Terasaki ElectricLtd (TSE:6637) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Terasaki Electric Co.,Ltd. (TSE:6637) does carry debt. But the more important question is: how much risk is that debt creating?

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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. 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.

What Is Terasaki ElectricLtd's Debt?

The chart below, which you can click on for greater detail, shows that Terasaki ElectricLtd had JP¥3.26b in debt in March 2025; about the same as the year before. However, its balance sheet shows it holds JP¥17.6b in cash, so it actually has JP¥14.4b net cash.

How Healthy Is Terasaki ElectricLtd's Balance Sheet?

We can see from the most recent balance sheet that Terasaki ElectricLtd had liabilities of JP¥16.6b falling due within a year, and liabilities of JP¥5.86b due beyond that. Offsetting this, it had JP¥17.6b in cash and JP¥13.9b in receivables that were due within 12 months. So it can boast JP¥9.01b more liquid assets than total liabilities.

It's good to see that Terasaki ElectricLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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!

Check out our latest analysis for Terasaki ElectricLtd

And we also note warmly that Terasaki ElectricLtd grew its EBIT by 14% 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 Terasaki ElectricLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Terasaki ElectricLtd recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Terasaki ElectricLtd has net cash of JP¥14.4b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 14% in the last twelve months. So is Terasaki ElectricLtd's debt a risk? It doesn't seem so to us. 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 Terasaki ElectricLtd .

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.