Tsunagu Group Holdings (TSE:6551) Seems To Use Debt Rather Sparingly

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.' 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 Tsunagu Group Holdings, Inc. (TSE:6551) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tsunagu Group Holdings

How Much Debt Does Tsunagu Group Holdings Carry?

As you can see below, Tsunagu Group Holdings had JP¥913.0m of debt at March 2024, down from JP¥1.21b a year prior. However, its balance sheet shows it holds JP¥968.0m in cash, so it actually has JP¥55.0m net cash.

How Healthy Is Tsunagu Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tsunagu Group Holdings had liabilities of JP¥2.54b due within 12 months and liabilities of JP¥599.0m due beyond that. Offsetting these obligations, it had cash of JP¥968.0m as well as receivables valued at JP¥2.04b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥135.0m.

Since publicly traded Tsunagu Group Holdings shares are worth a total of JP¥5.31b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Tsunagu Group Holdings 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 Tsunagu Group Holdings has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tsunagu Group Holdings will need earnings to service that debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. Tsunagu Group Holdings 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. Over the last three years, Tsunagu Group Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Tsunagu Group Holdings has JP¥55.0m in net cash. The cherry on top was that in converted 162% of that EBIT to free cash flow, bringing in JP¥529m. So is Tsunagu Group Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Tsunagu Group Holdings has 3 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.