Is TOPPAN Holdings (TSE:7911) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 TOPPAN Holdings Inc. (TSE:7911) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TOPPAN Holdings

How Much Debt Does TOPPAN Holdings Carry?

As you can see below, TOPPAN Holdings had JP¥189.5b of debt at June 2024, down from JP¥223.2b a year prior. But it also has JP¥502.1b in cash to offset that, meaning it has JP¥312.7b net cash.

A Look At TOPPAN Holdings' Liabilities

The latest balance sheet data shows that TOPPAN Holdings had liabilities of JP¥484.2b due within a year, and liabilities of JP¥334.0b falling due after that. On the other hand, it had cash of JP¥502.1b and JP¥397.1b worth of receivables due within a year. So it can boast JP¥81.0b more liquid assets than total liabilities.

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

The good news is that TOPPAN Holdings has increased its EBIT by 4.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TOPPAN Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TOPPAN 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. Looking at the most recent three years, TOPPAN Holdings recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TOPPAN Holdings has net cash of JP¥312.7b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 4.0% in the last twelve months. So we are not troubled with TOPPAN Holdings's debt use. 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. Case in point: We've spotted 1 warning sign for TOPPAN Holdings you should be aware of.

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.