Is Takasago Thermal Engineering (TSE:1969) Using Too Much 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.' 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. As with many other companies Takasago Thermal Engineering Co., Ltd. (TSE:1969) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Takasago Thermal Engineering Carry?

The image below, which you can click on for greater detail, shows that at June 2025 Takasago Thermal Engineering had debt of JP¥24.4b, up from JP¥22.2b in one year. But it also has JP¥37.3b in cash to offset that, meaning it has JP¥12.9b net cash.

How Healthy Is Takasago Thermal Engineering's Balance Sheet?

The latest balance sheet data shows that Takasago Thermal Engineering had liabilities of JP¥99.4b due within a year, and liabilities of JP¥20.6b falling due after that. On the other hand, it had cash of JP¥37.3b and JP¥150.8b worth of receivables due within a year. So it can boast JP¥68.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Takasago Thermal Engineering could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Takasago Thermal Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Takasago Thermal Engineering

In addition to that, we're happy to report that Takasago Thermal Engineering has boosted its EBIT by 67%, 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 Takasago Thermal Engineering'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 company can only pay off debt with cold hard cash, not accounting profits. Takasago Thermal Engineering 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. Looking at the most recent three years, Takasago Thermal Engineering recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Takasago Thermal Engineering has JP¥12.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 67% year-on-year EBIT growth. So we don't think Takasago Thermal Engineering's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Takasago Thermal Engineering 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.