Is Toyo Engineering (TSE:6330) 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, Toyo Engineering Corporation (TSE:6330) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Toyo Engineering Carry?

The image below, which you can click on for greater detail, shows that at September 2025 Toyo Engineering had debt of JP¥54.1b, up from JP¥46.6b in one year. But on the other hand it also has JP¥98.2b in cash, leading to a JP¥44.1b net cash position.

A Look At Toyo Engineering's Liabilities

The latest balance sheet data shows that Toyo Engineering had liabilities of JP¥168.1b due within a year, and liabilities of JP¥31.3b falling due after that. Offsetting this, it had JP¥98.2b in cash and JP¥86.9b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥14.5b.

Since publicly traded Toyo Engineering shares are worth a total of JP¥140.3b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Toyo Engineering also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Toyo Engineering 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.

Check out our latest analysis for Toyo Engineering

In the last year Toyo Engineering had a loss before interest and tax, and actually shrunk its revenue by 5.8%, to JP¥250b. We would much prefer see growth.

So How Risky Is Toyo Engineering?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Toyo Engineering lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥7.3b and booked a JP¥2.8b accounting loss. With only JP¥44.1b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Toyo Engineering .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.