We Think TORIDOLL Holdings (TSE:3397) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, TORIDOLL Holdings Corporation (TSE:3397) does carry debt. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about TORIDOLL Holdings. View them for free.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is TORIDOLL Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that TORIDOLL Holdings had JP¥79.0b in debt in December 2024; about the same as the year before. However, it also had JP¥75.0b in cash, and so its net debt is JP¥3.98b.

How Strong Is TORIDOLL Holdings' Balance Sheet?

We can see from the most recent balance sheet that TORIDOLL Holdings had liabilities of JP¥72.6b falling due within a year, and liabilities of JP¥158.2b due beyond that. Offsetting these obligations, it had cash of JP¥75.0b as well as receivables valued at JP¥10.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥145.5b.

This deficit isn't so bad because TORIDOLL Holdings is worth JP¥385.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, TORIDOLL Holdings has a very light debt load indeed.

See our latest analysis for TORIDOLL Holdings

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With debt at a measly 0.087 times EBITDA and EBIT covering interest a whopping 30.5 times, it's clear that TORIDOLL Holdings is not a desperate borrower. So relative to past earnings, the debt load seems trivial. On top of that, TORIDOLL Holdings grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TORIDOLL 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last two years, TORIDOLL Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

The good news is that TORIDOLL Holdings's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Considering this range of factors, it seems to us that TORIDOLL Holdings is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - TORIDOLL Holdings has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.