Does TOBA (TYO:7472) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that TOBA, INC. (TYO:7472) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TOBA

What Is TOBA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 TOBA had JP¥304.0m of debt, an increase on none, over one year. But it also has JP¥9.61b in cash to offset that, meaning it has JP¥9.31b net cash.

How Healthy Is TOBA's Balance Sheet?

The latest balance sheet data shows that TOBA had liabilities of JP¥7.28b due within a year, and liabilities of JP¥452.0m falling due after that. On the other hand, it had cash of JP¥9.61b and JP¥9.58b worth of receivables due within a year. So it actually has JP¥11.5b more liquid assets than total liabilities.

This surplus liquidity suggests that TOBA's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, TOBA boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that TOBA has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is TOBA's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While TOBA has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, TOBA recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case TOBA has JP¥9.31b in net cash and a strong balance sheet. And it impressed us with free cash flow of -JP¥439m, being 73% of its EBIT. So is TOBA's debt a risk? It doesn't seem so to us. Given TOBA has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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