Is Togami Electric Mfg (TSE:6643) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that Togami Electric Mfg. Co., Ltd. (TSE:6643) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Togami Electric Mfg

What Is Togami Electric Mfg's Debt?

As you can see below, Togami Electric Mfg had JP¥328.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥7.12b in cash to offset that, meaning it has JP¥6.80b net cash.

How Strong Is Togami Electric Mfg's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Togami Electric Mfg had liabilities of JP¥7.37b due within 12 months and liabilities of JP¥2.93b due beyond that. Offsetting this, it had JP¥7.12b in cash and JP¥6.44b in receivables that were due within 12 months. So it can boast JP¥3.26b more liquid assets than total liabilities.

This surplus liquidity suggests that Togami Electric Mfg's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Togami Electric Mfg 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 Togami Electric Mfg has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Togami Electric Mfg's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Togami Electric Mfg may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Togami Electric Mfg recorded free cash flow of 39% of its EBIT, which is weaker 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 Togami Electric Mfg has JP¥6.80b in net cash and a decent-looking balance sheet. And we liked the look of last year's 53% year-on-year EBIT growth. So is Togami Electric Mfg'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. For example - Togami Electric Mfg has 3 warning signs we think you should be aware of.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com