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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Tsuburaya Fields Holdings Inc. (TSE:2767) does use debt in its business. But is this debt a concern to shareholders?
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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Tsuburaya Fields Holdings
How Much Debt Does Tsuburaya Fields Holdings Carry?
As you can see below, Tsuburaya Fields Holdings had JP¥12.2b of debt at June 2024, down from JP¥13.6b a year prior. But it also has JP¥22.0b in cash to offset that, meaning it has JP¥9.82b net cash.
How Healthy Is Tsuburaya Fields Holdings' Balance Sheet?
We can see from the most recent balance sheet that Tsuburaya Fields Holdings had liabilities of JP¥28.7b falling due within a year, and liabilities of JP¥10.4b due beyond that. Offsetting these obligations, it had cash of JP¥22.0b as well as receivables valued at JP¥14.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥2.23b.
Having regard to Tsuburaya Fields Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥122.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Tsuburaya Fields Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Tsuburaya Fields Holdings saw its EBIT drop by 3.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tsuburaya Fields 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tsuburaya Fields Holdings 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 most recent three years, Tsuburaya Fields Holdings recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Tsuburaya Fields Holdings has JP¥9.82b in net cash. And it impressed us with free cash flow of JP¥1.7b, being 69% of its EBIT. So we don't think Tsuburaya Fields Holdings's use of debt is risky. 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. For instance, we've identified 3 warning signs for Tsuburaya Fields Holdings (2 are concerning) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About TSE:2767
Tsuburaya Fields Holdings
Engages in the content-related businesses in Japan.
Flawless balance sheet and undervalued.