TSUKADA GLOBAL HOLDINGS (TSE:2418) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that TSUKADA GLOBAL HOLDINGS Inc. (TSE:2418) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is TSUKADA GLOBAL HOLDINGS's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 TSUKADA GLOBAL HOLDINGS had JP¥59.4b of debt, an increase on JP¥49.2b, over one year. However, it also had JP¥21.2b in cash, and so its net debt is JP¥38.2b.

How Strong Is TSUKADA GLOBAL HOLDINGS' Balance Sheet?

We can see from the most recent balance sheet that TSUKADA GLOBAL HOLDINGS had liabilities of JP¥20.9b falling due within a year, and liabilities of JP¥56.8b due beyond that. Offsetting this, it had JP¥21.2b in cash and JP¥2.01b in receivables that were due within 12 months. So it has liabilities totalling JP¥54.5b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the JP¥25.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, TSUKADA GLOBAL HOLDINGS would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for TSUKADA GLOBAL HOLDINGS

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

TSUKADA GLOBAL HOLDINGS's net debt is 3.4 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 14.6 is very high, suggesting that the interest expense on the debt is currently quite low. It is well worth noting that TSUKADA GLOBAL HOLDINGS's EBIT shot up like bamboo after rain, gaining 39% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But it is TSUKADA GLOBAL HOLDINGS's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, TSUKADA GLOBAL HOLDINGS's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

We feel some trepidation about TSUKADA GLOBAL HOLDINGS's difficulty level of total liabilities, but we've got positives to focus on, too. For example, its interest cover and EBIT growth rate give us some confidence in its ability to manage its debt. Taking the abovementioned factors together we do think TSUKADA GLOBAL HOLDINGS's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for TSUKADA GLOBAL HOLDINGS (1 doesn't sit too well with us) 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.