Is Toyo Suisan Kaisha (TSE:2875) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Toyo Suisan Kaisha, Ltd. (TSE:2875) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Toyo Suisan Kaisha

What Is Toyo Suisan Kaisha's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Toyo Suisan Kaisha had JP¥463.0m of debt, an increase on JP¥387.0m, over one year. But on the other hand it also has JP¥244.0b in cash, leading to a JP¥243.5b net cash position.

How Strong Is Toyo Suisan Kaisha's Balance Sheet?

The latest balance sheet data shows that Toyo Suisan Kaisha had liabilities of JP¥68.6b due within a year, and liabilities of JP¥26.8b falling due after that. Offsetting these obligations, it had cash of JP¥244.0b as well as receivables valued at JP¥62.3b due within 12 months. So it actually has JP¥210.9b more liquid assets than total liabilities.

This surplus suggests that Toyo Suisan Kaisha is using debt in a way that is appears to be both safe and conservative. 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!

On top of that, Toyo Suisan Kaisha grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Toyo Suisan Kaisha'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, a company can only pay off debt with cold hard cash, not accounting profits. While Toyo Suisan Kaisha 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 most recent three years, Toyo Suisan Kaisha recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Toyo Suisan Kaisha has JP¥243.5b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 47% over the last year. So we don't think Toyo Suisan Kaisha's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Toyo Suisan Kaisha, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's 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.