Is TOCALOLtd (TSE:3433) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, TOCALO Co.,Ltd. (TSE:3433) does carry debt. But is this debt a concern to shareholders?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does TOCALOLtd Carry?

You can click the graphic below for the historical numbers, but it shows that TOCALOLtd had JP¥3.40b of debt in June 2025, down from JP¥4.69b, one year before. However, it does have JP¥15.7b in cash offsetting this, leading to net cash of JP¥12.3b.

A Look At TOCALOLtd's Liabilities

According to the last reported balance sheet, TOCALOLtd had liabilities of JP¥12.2b due within 12 months, and liabilities of JP¥2.63b due beyond 12 months. Offsetting these obligations, it had cash of JP¥15.7b as well as receivables valued at JP¥15.6b due within 12 months. So it actually has JP¥16.5b more liquid assets than total liabilities.

This surplus suggests that TOCALOLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that TOCALOLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for TOCALOLtd

On top of that, TOCALOLtd grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TOCALOLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TOCALOLtd 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. In the last three years, TOCALOLtd's free cash flow amounted to 29% 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 TOCALOLtd has JP¥12.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 40% year-on-year EBIT growth. So is TOCALOLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for TOCALOLtd that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.