Tsuruha Holdings (TSE:3391) Seems To Use Debt Quite Sensibly

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.' 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. We can see that Tsuruha Holdings Inc. (TSE:3391) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tsuruha Holdings

How Much Debt Does Tsuruha Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Tsuruha Holdings had JP¥34.1b of debt in February 2024, down from JP¥41.3b, one year before. But on the other hand it also has JP¥51.3b in cash, leading to a JP¥17.2b net cash position.

How Healthy Is Tsuruha Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tsuruha Holdings had liabilities of JP¥174.4b due within 12 months and liabilities of JP¥61.9b due beyond that. Offsetting this, it had JP¥51.3b in cash and JP¥46.5b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥138.5b.

This deficit isn't so bad because Tsuruha Holdings is worth JP¥453.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 8.8% 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tsuruha 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. In the last three years, Tsuruha Holdings created free cash flow amounting to 4.4% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay 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¥17.2b. And it also grew its EBIT by 8.8% over the last year. So we are not troubled with Tsuruha Holdings's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Tsuruha Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.