TOPPAN Holdings (TSE:7911) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies TOPPAN Holdings Inc. (TSE:7911) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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?

You can click the graphic below for the historical numbers, but it shows that TOPPAN Holdings had JP¥219.7b of debt in December 2023, down from JP¥269.0b, one year before. But it also has JP¥531.4b in cash to offset that, meaning it has JP¥311.6b net cash.

A Look At TOPPAN Holdings' Liabilities

The latest balance sheet data shows that TOPPAN Holdings had liabilities of JP¥490.5b due within a year, and liabilities of JP¥328.0b falling due after that. Offsetting this, it had JP¥531.4b in cash and JP¥402.1b in receivables that were due within 12 months. So it can boast JP¥115.0b more liquid assets than total liabilities.

This short term liquidity is a sign that TOPPAN Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TOPPAN Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, TOPPAN Holdings's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TOPPAN Holdings 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. 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. In the last three years, TOPPAN Holdings's free cash flow amounted to 39% of its EBIT, less 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¥311.6b, as well as more liquid assets than liabilities. So we don't have any problem with TOPPAN Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for TOPPAN Holdings that 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.