TOPPAN Holdings (TSE:7911) 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 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 should shareholders be worried about its use of debt?

Our free stock report includes 2 warning signs investors should be aware of before investing in TOPPAN Holdings. Read for free now.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is TOPPAN Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that TOPPAN Holdings had JP¥171.0b of debt in December 2024, down from JP¥219.7b, one year before. However, it does have JP¥420.4b in cash offsetting this, leading to net cash of JP¥249.4b.

How Strong Is TOPPAN Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TOPPAN Holdings had liabilities of JP¥472.7b due within 12 months and liabilities of JP¥319.3b due beyond that. Offsetting this, it had JP¥420.4b in cash and JP¥405.5b in receivables that were due within 12 months. So it actually has JP¥33.9b 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.

Check out our latest analysis for TOPPAN Holdings

In addition to that, we're happy to report that TOPPAN Holdings has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 23% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case TOPPAN Holdings has JP¥249.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 32% over the last year. So is TOPPAN Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for TOPPAN Holdings that you should be aware of before investing here.

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.