Is tripla (TSE:5136) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies tripla Co., Ltd. (TSE:5136) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for tripla

What Is tripla's Net Debt?

As you can see below, at the end of July 2024, tripla had JP¥771.2m of debt, up from JP¥214.0m a year ago. Click the image for more detail. However, it does have JP¥8.20b in cash offsetting this, leading to net cash of JP¥7.43b.

How Healthy Is tripla's Balance Sheet?

We can see from the most recent balance sheet that tripla had liabilities of JP¥7.28b falling due within a year, and liabilities of JP¥629.1m due beyond that. Offsetting this, it had JP¥8.20b in cash and JP¥247.5m in receivables that were due within 12 months. So it can boast JP¥533.4m more liquid assets than total liabilities.

This short term liquidity is a sign that tripla could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that tripla has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that tripla saw its EBIT decline by 2.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since tripla will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. tripla 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. Over the last three years, tripla actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case tripla has JP¥7.43b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥2.3b, being 1,259% of its EBIT. So is tripla's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with tripla (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.