Takeda iP HoldingsLtd (TSE:7875) Has A Pretty 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.' 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 can see that Takeda iP Holdings Co.,Ltd. (TSE:7875) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Takeda iP HoldingsLtd

What Is Takeda iP HoldingsLtd's Debt?

As you can see below, Takeda iP HoldingsLtd had JP¥2.26b of debt at December 2023, down from JP¥2.39b a year prior. But on the other hand it also has JP¥6.94b in cash, leading to a JP¥4.68b net cash position.

How Strong Is Takeda iP HoldingsLtd's Balance Sheet?

The latest balance sheet data shows that Takeda iP HoldingsLtd had liabilities of JP¥9.31b due within a year, and liabilities of JP¥4.69b falling due after that. Offsetting these obligations, it had cash of JP¥6.94b as well as receivables valued at JP¥6.68b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥383.0m.

Given Takeda iP HoldingsLtd has a market capitalization of JP¥7.90b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Takeda iP HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Takeda iP HoldingsLtd has seen its EBIT plunge 20% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Takeda iP HoldingsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Takeda iP HoldingsLtd 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. Over the last three years, Takeda iP HoldingsLtd recorded free cash flow worth a fulsome 89% 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

We could understand if investors are concerned about Takeda iP HoldingsLtd's liabilities, but we can be reassured by the fact it has has net cash of JP¥4.68b. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in JP¥1.1b. So we are not troubled with Takeda iP HoldingsLtd's debt use. 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. To that end, you should learn about the 4 warning signs we've spotted with Takeda iP HoldingsLtd (including 1 which is potentially serious) .

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.