Is Terasaki ElectricLtd (TSE:6637) A Risky Investment?

Warren Buffett famously said, '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 can see that Terasaki Electric Co.,Ltd. (TSE:6637) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Terasaki ElectricLtd

How Much Debt Does Terasaki ElectricLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Terasaki ElectricLtd had JP¥2.22b of debt, an increase on JP¥2.02b, over one year. But it also has JP¥11.2b in cash to offset that, meaning it has JP¥9.00b net cash.

How Strong Is Terasaki ElectricLtd's Balance Sheet?

The latest balance sheet data shows that Terasaki ElectricLtd had liabilities of JP¥14.8b due within a year, and liabilities of JP¥4.81b falling due after that. Offsetting this, it had JP¥11.2b in cash and JP¥16.3b in receivables that were due within 12 months. So it can boast JP¥7.91b more liquid assets than total liabilities.

This excess liquidity suggests that Terasaki ElectricLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Terasaki ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Terasaki ElectricLtd has boosted its EBIT by 88%, thus reducing the spectre of future debt repayments. 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 Terasaki ElectricLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Terasaki ElectricLtd 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, Terasaki ElectricLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Terasaki ElectricLtd has JP¥9.00b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 88% over the last year. So is Terasaki ElectricLtd'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. To that end, you should learn about the 2 warning signs we've spotted with Terasaki ElectricLtd (including 1 which is potentially serious) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.