Here's Why Terminalcare Support Institute (TSE:7362) Is Weighed Down By Its Debt Load

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.' 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. Importantly, Terminalcare Support Institute Inc. (TSE:7362) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Terminalcare Support Institute

What Is Terminalcare Support Institute's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Terminalcare Support Institute had JP¥2.42b of debt, an increase on JP¥1.86b, over one year. However, it also had JP¥1.16b in cash, and so its net debt is JP¥1.26b.

A Look At Terminalcare Support Institute's Liabilities

We can see from the most recent balance sheet that Terminalcare Support Institute had liabilities of JP¥1.39b falling due within a year, and liabilities of JP¥1.62b due beyond that. On the other hand, it had cash of JP¥1.16b and JP¥394.0m worth of receivables due within a year. So it has liabilities totalling JP¥1.46b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥1.66b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Terminalcare Support Institute has a rather high debt to EBITDA ratio of 7.1 which suggests a meaningful debt load. However, its interest coverage of 2.9 is reasonably strong, which is a good sign. Another concern for investors might be that Terminalcare Support Institute's EBIT fell 10.0% in the last year. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Terminalcare Support Institute will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Terminalcare Support Institute burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Terminalcare Support Institute's net debt to EBITDA and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. And furthermore, its EBIT growth rate also fails to instill confidence. It's also worth noting that Terminalcare Support Institute is in the Healthcare industry, which is often considered to be quite defensive. Overall, it seems to us that Terminalcare Support Institute's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Terminalcare Support Institute you should be aware of, and 4 of them shouldn't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.