Terumo (TSE:4543) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Terumo Corporation (TSE:4543) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Terumo

What Is Terumo's Debt?

The image below, which you can click on for greater detail, shows that Terumo had debt of JP¥174.8b at the end of September 2024, a reduction from JP¥231.4b over a year. But on the other hand it also has JP¥194.9b in cash, leading to a JP¥20.1b net cash position.

A Look At Terumo's Liabilities

Zooming in on the latest balance sheet data, we can see that Terumo had liabilities of JP¥231.0b due within 12 months and liabilities of JP¥207.7b due beyond that. On the other hand, it had cash of JP¥194.9b and JP¥165.7b worth of receivables due within a year. So it has liabilities totalling JP¥78.1b more than its cash and near-term receivables, combined.

This state of affairs indicates that Terumo's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥4.41t company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Terumo boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Terumo grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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 Terumo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Terumo 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. During the last three years, Terumo produced sturdy free cash flow equating to 54% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Terumo has JP¥20.1b in net cash. And it impressed us with its EBIT growth of 24% over the last year. So is Terumo's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Terumo, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.