Is Tsuruha Holdings (TSE:3391) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Tsuruha Holdings Inc. (TSE:3391) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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

The latest balance sheet data shows that Tsuruha Holdings had liabilities of JP¥187.0b due within a year, and liabilities of JP¥58.9b falling due after that. Offsetting these obligations, it had cash of JP¥65.6b as well as receivables valued at JP¥50.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥129.9b.

Tsuruha Holdings has a market capitalization of JP¥436.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Tsuruha Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Tsuruha Holdings grew its EBIT by 8.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. On top of that, it increased its EBIT by 8.3% in the last twelve months. So we don't have any problem with Tsuruha Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Tsuruha 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.