Does TechnoPro Holdings (TSE:6028) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 TechnoPro Holdings, Inc. (TSE:6028) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TechnoPro Holdings

What Is TechnoPro Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that TechnoPro Holdings had debt of JP¥13.5b at the end of September 2024, a reduction from JP¥14.5b over a year. But it also has JP¥32.7b in cash to offset that, meaning it has JP¥19.3b net cash.

How Strong Is TechnoPro Holdings' Balance Sheet?

We can see from the most recent balance sheet that TechnoPro Holdings had liabilities of JP¥52.9b falling due within a year, and liabilities of JP¥12.3b due beyond that. On the other hand, it had cash of JP¥32.7b and JP¥29.1b worth of receivables due within a year. So its liabilities total JP¥3.37b more than the combination of its cash and short-term receivables.

This state of affairs indicates that TechnoPro Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥329.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, TechnoPro Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, TechnoPro Holdings grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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 TechnoPro Holdings 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 TechnoPro Holdings 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. Happily for any shareholders, TechnoPro Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that TechnoPro Holdings has JP¥19.3b in net cash. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in JP¥24b. So is TechnoPro Holdings'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 be aware of the 1 warning sign we've spotted with TechnoPro Holdings .

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.