Does TWOSTONE&Sons (TSE:7352) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, TWOSTONE&Sons Inc. (TSE:7352) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is TWOSTONE&Sons's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of May 2025 TWOSTONE&Sons had JP¥3.08b of debt, an increase on JP¥2.10b, over one year. But on the other hand it also has JP¥4.56b in cash, leading to a JP¥1.48b net cash position.

How Strong Is TWOSTONE&Sons' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TWOSTONE&Sons had liabilities of JP¥3.42b due within 12 months and liabilities of JP¥2.09b due beyond that. Offsetting these obligations, it had cash of JP¥4.56b as well as receivables valued at JP¥2.23b due within 12 months. So it can boast JP¥1.28b more liquid assets than total liabilities.

This short term liquidity is a sign that TWOSTONE&Sons could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, TWOSTONE&Sons boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for TWOSTONE&Sons

Better yet, TWOSTONE&Sons grew its EBIT by 583% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TWOSTONE&Sons'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 company can only pay off debt with cold hard cash, not accounting profits. TWOSTONE&Sons 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, TWOSTONE&Sons recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case TWOSTONE&Sons has JP¥1.48b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.1b, being 93% of its EBIT. So is TWOSTONE&Sons'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. Be aware that TWOSTONE&Sons is showing 1 warning sign in our investment analysis , you should know about...

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.