These 4 Measures Indicate That Toyo Suisan Kaisha (TSE:2875) Is Using Debt Safely

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. 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?

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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Toyo Suisan Kaisha

How Much Debt Does Toyo Suisan Kaisha Carry?

The chart below, which you can click on for greater detail, shows that Toyo Suisan Kaisha had JP¥390.0m in debt in March 2024; about the same as the year before. However, it does have JP¥254.7b in cash offsetting this, leading to net cash of JP¥254.3b.

How Strong Is Toyo Suisan Kaisha's Balance Sheet?

The latest balance sheet data shows that Toyo Suisan Kaisha had liabilities of JP¥69.8b due within a year, and liabilities of JP¥26.6b falling due after that. On the other hand, it had cash of JP¥254.7b and JP¥64.2b worth of receivables due within a year. So it can boast JP¥222.5b 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. Simply put, the fact that Toyo Suisan Kaisha has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Toyo Suisan Kaisha has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the most recent three years, Toyo Suisan Kaisha recorded free cash flow worth 73% 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¥254.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 65% year-on-year EBIT growth. So we don't think Toyo Suisan Kaisha's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Toyo Suisan Kaisha , and understanding them should be part of your investment process.

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.