We Think Taihei Dengyo Kaisha (TSE:1968) Can Stay On Top Of Its Debt

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.' 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, Taihei Dengyo Kaisha, Ltd. (TSE:1968) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Taihei Dengyo Kaisha

What Is Taihei Dengyo Kaisha's Debt?

The image below, which you can click on for greater detail, shows that Taihei Dengyo Kaisha had debt of JP¥14.3b at the end of June 2024, a reduction from JP¥15.2b over a year. But it also has JP¥47.6b in cash to offset that, meaning it has JP¥33.3b net cash.

A Look At Taihei Dengyo Kaisha's Liabilities

Zooming in on the latest balance sheet data, we can see that Taihei Dengyo Kaisha had liabilities of JP¥39.0b due within 12 months and liabilities of JP¥13.7b due beyond that. On the other hand, it had cash of JP¥47.6b and JP¥43.6b worth of receivables due within a year. So it actually has JP¥38.5b more liquid assets than total liabilities.

This surplus strongly suggests that Taihei Dengyo Kaisha has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Taihei Dengyo Kaisha has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Taihei Dengyo Kaisha saw its EBIT decline by 4.1% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Taihei Dengyo Kaisha can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Taihei Dengyo Kaisha 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. In the last three years, Taihei Dengyo Kaisha's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Taihei Dengyo Kaisha has JP¥33.3b in net cash and a decent-looking balance sheet. So we don't think Taihei Dengyo Kaisha's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Taihei Dengyo Kaisha you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.