These 4 Measures Indicate That Takasago Thermal Engineering (TSE:1969) Is Using Debt Safely

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Takasago Thermal Engineering Co., Ltd. (TSE:1969) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Takasago Thermal Engineering

What Is Takasago Thermal Engineering's Net Debt?

The image below, which you can click on for greater detail, shows that Takasago Thermal Engineering had debt of JP¥22.4b at the end of September 2024, a reduction from JP¥29.0b over a year. However, its balance sheet shows it holds JP¥51.3b in cash, so it actually has JP¥28.9b net cash.

How Strong Is Takasago Thermal Engineering's Balance Sheet?

According to the last reported balance sheet, Takasago Thermal Engineering had liabilities of JP¥106.4b due within 12 months, and liabilities of JP¥25.7b due beyond 12 months. Offsetting these obligations, it had cash of JP¥51.3b as well as receivables valued at JP¥141.4b due within 12 months. So it can boast JP¥60.7b more liquid assets than total liabilities.

This surplus suggests that Takasago Thermal Engineering has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Takasago Thermal Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Takasago Thermal Engineering grew its EBIT by 17% last year, making its debt load easier to handle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the most recent three years, Takasago Thermal Engineering recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Takasago Thermal Engineering has JP¥28.9b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 17% over the last year. So we don't think Takasago Thermal Engineering's use of debt is risky. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.