Is TWOSTONE&Sons (TSE:7352) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that TWOSTONE&Sons Inc. (TSE:7352) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does TWOSTONE&Sons Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2024 TWOSTONE&Sons had JP¥2.36b of debt, an increase on JP¥1.85b, over one year. But it also has JP¥3.51b in cash to offset that, meaning it has JP¥1.16b net cash.

A Look At TWOSTONE&Sons' Liabilities

Zooming in on the latest balance sheet data, we can see that TWOSTONE&Sons had liabilities of JP¥2.70b due within 12 months and liabilities of JP¥1.71b due beyond that. Offsetting this, it had JP¥3.51b in cash and JP¥2.15b in receivables that were due within 12 months. So it actually has JP¥1.25b more liquid assets than total liabilities.

This surplus suggests that TWOSTONE&Sons has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that TWOSTONE&Sons has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for TWOSTONE&Sons

Better yet, TWOSTONE&Sons grew its EBIT by 114% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 TWOSTONE&Sons can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last three years, TWOSTONE&Sons produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case TWOSTONE&Sons has JP¥1.16b in net cash and a decent-looking balance sheet. And we liked the look of last year's 114% year-on-year EBIT growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for TWOSTONE&Sons you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.