Does Techno Ryowa (TSE:1965) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Techno Ryowa Ltd. (TSE:1965) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Techno Ryowa's Debt?

You can click the graphic below for the historical numbers, but it shows that Techno Ryowa had JP¥840.0m of debt in December 2024, down from JP¥900.0m, one year before. However, it does have JP¥10.0b in cash offsetting this, leading to net cash of JP¥9.20b.

A Look At Techno Ryowa's Liabilities

The latest balance sheet data shows that Techno Ryowa had liabilities of JP¥18.2b due within a year, and liabilities of JP¥4.04b falling due after that. Offsetting this, it had JP¥10.0b in cash and JP¥35.4b in receivables that were due within 12 months. So it actually has JP¥23.2b more liquid assets than total liabilities.

This surplus liquidity suggests that Techno Ryowa'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, Techno Ryowa boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Techno Ryowa

On top of that, Techno Ryowa grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Techno Ryowa will need earnings to service that debt. 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 .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Techno Ryowa 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. Considering the last three years, Techno Ryowa actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Techno Ryowa has JP¥9.20b in net cash and a decent-looking balance sheet. And we liked the look of last year's 84% year-on-year EBIT growth. So is Techno Ryowa's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Techno Ryowa is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.