Takasago Thermal Engineering (TSE:1969) Has A Rock Solid 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.' 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 Takasago Thermal Engineering Co., Ltd. (TSE:1969) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Takasago Thermal Engineering

What Is Takasago Thermal Engineering's Debt?

As you can see below, Takasago Thermal Engineering had JP¥32.9b of debt at December 2023, down from JP¥47.1b a year prior. However, it does have JP¥40.4b in cash offsetting this, leading to net cash of JP¥7.53b.

How Strong Is Takasago Thermal Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Takasago Thermal Engineering had liabilities of JP¥137.5b due within 12 months and liabilities of JP¥25.0b due beyond that. On the other hand, it had cash of JP¥40.4b and JP¥177.8b worth of receivables due within a year. So it actually has JP¥55.7b more liquid assets than total liabilities.

This surplus suggests that Takasago Thermal Engineering is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Takasago Thermal Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Takasago Thermal Engineering grew its EBIT by 66% 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 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Takasago Thermal Engineering 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. Looking at the most recent three years, Takasago Thermal Engineering recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Takasago Thermal Engineering has net cash of JP¥7.53b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 66% over the last year. So is Takasago Thermal Engineering's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Takasago Thermal Engineering, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.