Does Toyo Suisan Kaisha (TSE:2875) Have A Healthy 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.' 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. We note that Toyo Suisan Kaisha, Ltd. (TSE:2875) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Toyo Suisan Kaisha

What Is Toyo Suisan Kaisha's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Toyo Suisan Kaisha had debt of JP¥396.0m, up from JP¥375.0m in one year. However, its balance sheet shows it holds JP¥278.2b in cash, so it actually has JP¥277.8b net cash.

How Healthy Is Toyo Suisan Kaisha's Balance Sheet?

According to the last reported balance sheet, Toyo Suisan Kaisha had liabilities of JP¥78.8b due within 12 months, and liabilities of JP¥26.9b due beyond 12 months. On the other hand, it had cash of JP¥278.2b and JP¥65.4b worth of receivables due within a year. So it can boast JP¥237.9b more liquid assets than total liabilities.

It's good to see that Toyo Suisan Kaisha has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Toyo Suisan Kaisha boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Toyo Suisan Kaisha has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Toyo Suisan Kaisha 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. Toyo Suisan Kaisha 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. During the last three years, Toyo Suisan Kaisha produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Toyo Suisan Kaisha has net cash of JP¥277.8b, as well as more liquid assets than liabilities. And we liked the look of last year's 72% year-on-year EBIT growth. When it comes to Toyo Suisan Kaisha's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 Toyo Suisan Kaisha's earnings per share history for free.

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.