We Think TokyotokeibaLtd (TSE:9672) Can Stay On Top Of Its 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.' 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. Importantly, Tokyotokeiba Co.,Ltd. (TSE:9672) does carry debt. But the more important question is: how much risk is that debt creating?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is TokyotokeibaLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that TokyotokeibaLtd had JP¥17.9b of debt in September 2025, down from JP¥19.6b, one year before. But on the other hand it also has JP¥25.2b in cash, leading to a JP¥7.33b net cash position.

How Healthy Is TokyotokeibaLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TokyotokeibaLtd had liabilities of JP¥12.1b due within 12 months and liabilities of JP¥20.4b due beyond that. Offsetting these obligations, it had cash of JP¥25.2b as well as receivables valued at JP¥3.88b due within 12 months. So it has liabilities totalling JP¥3.34b more than its cash and near-term receivables, combined.

Since publicly traded TokyotokeibaLtd shares are worth a total of JP¥136.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, TokyotokeibaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for TokyotokeibaLtd

Fortunately, TokyotokeibaLtd grew its EBIT by 8.3% in the last year, making that debt load look even more manageable. 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 TokyotokeibaLtd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. TokyotokeibaLtd 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. Looking at the most recent three years, TokyotokeibaLtd recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about TokyotokeibaLtd's liabilities, but we can be reassured by the fact it has has net cash of JP¥7.33b. On top of that, it increased its EBIT by 8.3% in the last twelve months. So we are not troubled with TokyotokeibaLtd's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TokyotokeibaLtd's earnings per share history for free.

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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.