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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, TOPPAN Holdings Inc. (TSE:7911) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for TOPPAN Holdings

What Is TOPPAN Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that TOPPAN Holdings had JP¥180.0b of debt in September 2024, down from JP¥218.2b, one year before. However, it does have JP¥460.7b in cash offsetting this, leading to net cash of JP¥280.7b.

A Look At TOPPAN Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that TOPPAN Holdings had liabilities of JP¥487.1b due within 12 months and liabilities of JP¥310.5b due beyond that. On the other hand, it had cash of JP¥460.7b and JP¥393.5b worth of receivables due within a year. So it can boast JP¥56.5b 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 4.5% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TOPPAN Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, TOPPAN Holdings reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TOPPAN Holdings has net cash of JP¥280.7b, as well as more liquid assets than liabilities. And it also grew its EBIT by 4.5% over the last year. So we are not troubled with TOPPAN Holdings'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for TOPPAN Holdings (of which 1 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.