Does Totetsu Kogyo (TSE:1835) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Totetsu Kogyo Co., Ltd. (TSE:1835) does carry debt. But is this debt a concern to shareholders?

Our free stock report includes 1 warning sign investors should be aware of before investing in Totetsu Kogyo. Read for free now.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Totetsu Kogyo's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Totetsu Kogyo had debt of JP¥5.00b, up from none in one year. But on the other hand it also has JP¥11.4b in cash, leading to a JP¥6.41b net cash position.

How Strong Is Totetsu Kogyo's Balance Sheet?

We can see from the most recent balance sheet that Totetsu Kogyo had liabilities of JP¥41.8b falling due within a year, and liabilities of JP¥4.64b due beyond that. On the other hand, it had cash of JP¥11.4b and JP¥96.7b worth of receivables due within a year. So it can boast JP¥61.7b more liquid assets than total liabilities.

This surplus liquidity suggests that Totetsu Kogyo's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Totetsu Kogyo boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Totetsu Kogyo

In addition to that, we're happy to report that Totetsu Kogyo has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Totetsu Kogyo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Totetsu Kogyo may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Totetsu Kogyo saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Totetsu Kogyo has JP¥6.41b in net cash and a decent-looking balance sheet. And we liked the look of last year's 33% year-on-year EBIT growth. So we don't think Totetsu Kogyo's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Totetsu Kogyo you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.