Is Tokyo Ohka Kogyo (TSE:4186) A Risky Investment?

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 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 Tokyo Ohka Kogyo Co., Ltd. (TSE:4186) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tokyo Ohka Kogyo

What Is Tokyo Ohka Kogyo's Debt?

The chart below, which you can click on for greater detail, shows that Tokyo Ohka Kogyo had JP¥10.5b in debt in December 2024; about the same as the year before. However, it does have JP¥63.0b in cash offsetting this, leading to net cash of JP¥52.5b.

How Strong Is Tokyo Ohka Kogyo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tokyo Ohka Kogyo had liabilities of JP¥54.1b due within 12 months and liabilities of JP¥14.4b due beyond that. Offsetting these obligations, it had cash of JP¥63.0b as well as receivables valued at JP¥42.8b due within 12 months. So it can boast JP¥37.3b more liquid assets than total liabilities.

This surplus suggests that Tokyo Ohka Kogyo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tokyo Ohka Kogyo boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Tokyo Ohka Kogyo grew its EBIT by 46% 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 Tokyo Ohka Kogyo'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. Tokyo Ohka Kogyo 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 last three years, Tokyo Ohka Kogyo reported free cash flow worth 16% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tokyo Ohka Kogyo has net cash of JP¥52.5b, as well as more liquid assets than liabilities. And we liked the look of last year's 46% year-on-year EBIT growth. So we don't think Tokyo Ohka Kogyo's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Tokyo Ohka Kogyo , and understanding them should be part of your investment process.

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.

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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.