Here's Why TACLtd (TSE:4319) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, TAC Co.,Ltd. (TSE:4319) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TACLtd

What Is TACLtd's Net Debt?

As you can see below, TACLtd had JP¥5.90b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥6.59b in cash to offset that, meaning it has JP¥689.0m net cash.

How Strong Is TACLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TACLtd had liabilities of JP¥12.6b due within 12 months and liabilities of JP¥2.24b due beyond that. Offsetting this, it had JP¥6.59b in cash and JP¥4.29b in receivables that were due within 12 months. So it has liabilities totalling JP¥3.97b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of JP¥4.08b, so it does suggest shareholders should keep an eye on TACLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, TACLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, TACLtd turned things around in the last 12 months, delivering and EBIT of JP¥263m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TACLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While TACLtd 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. Over the last year, TACLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While TACLtd does have more liabilities than liquid assets, it also has net cash of JP¥689.0m. And it impressed us with free cash flow of JP¥518m, being 197% of its EBIT. So we are not troubled with TACLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for TACLtd (of which 1 makes us a bit uncomfortable!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.