Terumo (TSE:4543) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Terumo Corporation (TSE:4543) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Terumo Carry?

The image below, which you can click on for greater detail, shows that Terumo had debt of JP¥174.8b at the end of March 2025, a reduction from JP¥231.8b over a year. However, its balance sheet shows it holds JP¥222.2b in cash, so it actually has JP¥47.4b net cash.

How Healthy Is Terumo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Terumo had liabilities of JP¥241.0b due within 12 months and liabilities of JP¥218.9b due beyond that. Offsetting these obligations, it had cash of JP¥222.2b as well as receivables valued at JP¥180.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥57.6b.

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¥3.65t 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!

See our latest analysis for Terumo

On top of that, Terumo grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Terumo 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, 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¥47.4b in net cash. And we liked the look of last year's 30% year-on-year EBIT growth. 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.

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.