Does Tsuruha Holdings (TSE:3391) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tsuruha Holdings Inc. (TSE:3391) makes use of debt. But is this debt a concern to shareholders?

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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tsuruha Holdings

What Is Tsuruha Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tsuruha Holdings had JP¥35.5b of debt in August 2024, down from JP¥37.7b, one year before. However, its balance sheet shows it holds JP¥65.6b in cash, so it actually has JP¥30.1b net cash.

A Look At Tsuruha Holdings' Liabilities

We can see from the most recent balance sheet that Tsuruha Holdings had liabilities of JP¥187.0b falling due within a year, and liabilities of JP¥58.9b due beyond that. On the other hand, it had cash of JP¥65.6b and JP¥50.4b worth of receivables due within a year. So it has liabilities totalling JP¥129.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Tsuruha Holdings has a market capitalization of JP¥427.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Tsuruha Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Tsuruha Holdings has increased its EBIT by 8.3% 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 it is future earnings, more than anything, that will determine Tsuruha 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tsuruha 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, Tsuruha Holdings's free cash flow amounted to 20% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Tsuruha Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥30.1b. And it also grew its EBIT by 8.3% over the last year. So we are not troubled with Tsuruha Holdings's debt use. 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 instance, we've identified 1 warning sign for Tsuruha Holdings that 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.