Tsubakimoto Chain (TSE:6371) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tsubakimoto Chain Co. (TSE:6371) does carry debt. But should shareholders be worried about its use of debt?

Our free stock report includes 1 warning sign investors should be aware of before investing in Tsubakimoto Chain. Read for free now.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Tsubakimoto Chain's Debt?

You can click the graphic below for the historical numbers, but it shows that Tsubakimoto Chain had JP¥27.8b of debt in December 2024, down from JP¥34.0b, one year before. But on the other hand it also has JP¥63.0b in cash, leading to a JP¥35.2b net cash position.

How Strong Is Tsubakimoto Chain's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tsubakimoto Chain had liabilities of JP¥68.2b due within 12 months and liabilities of JP¥48.4b due beyond that. Offsetting this, it had JP¥63.0b in cash and JP¥67.9b in receivables that were due within 12 months. So it actually has JP¥14.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Tsubakimoto Chain could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tsubakimoto Chain has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Tsubakimoto Chain

Also good is that Tsubakimoto Chain grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tsubakimoto Chain 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tsubakimoto Chain 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. During the last three years, Tsubakimoto Chain produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tsubakimoto Chain has net cash of JP¥35.2b, as well as more liquid assets than liabilities. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in JP¥11b. So is Tsubakimoto Chain'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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tsubakimoto Chain is showing 1 warning sign in our investment analysis , you should know about...

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.