TOMY Company (TSE:7867) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 TOMY Company, Ltd. (TSE:7867) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does TOMY Company Carry?

You can click the graphic below for the historical numbers, but it shows that TOMY Company had JP¥3.23b of debt in June 2025, down from JP¥8.70b, one year before. But on the other hand it also has JP¥42.6b in cash, leading to a JP¥39.4b net cash position.

How Healthy Is TOMY Company's Balance Sheet?

According to the last reported balance sheet, TOMY Company had liabilities of JP¥49.0b due within 12 months, and liabilities of JP¥7.49b due beyond 12 months. Offsetting these obligations, it had cash of JP¥42.6b as well as receivables valued at JP¥29.9b due within 12 months. So it can boast JP¥16.1b more liquid assets than total liabilities.

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

See our latest analysis for TOMY Company

Another good sign is that TOMY Company has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. 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 TOMY Company 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TOMY Company 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 most recent three years, TOMY Company recorded free cash flow worth 74% 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 investigate a company's debt, in this case TOMY Company has JP¥39.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 25% over the last year. So we don't think TOMY Company's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - TOMY Company has 1 warning sign we think 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.