We Think Tokyo Ohka Kogyo (TSE:4186) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. We can see that Tokyo Ohka Kogyo Co., Ltd. (TSE:4186) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tokyo Ohka Kogyo

How Much Debt Does Tokyo Ohka Kogyo Carry?

The chart below, which you can click on for greater detail, shows that Tokyo Ohka Kogyo had JP¥10.5b in debt in March 2024; about the same as the year before. But on the other hand it also has JP¥70.4b in cash, leading to a JP¥59.9b net cash position.

How Strong Is Tokyo Ohka Kogyo's Balance Sheet?

We can see from the most recent balance sheet that Tokyo Ohka Kogyo had liabilities of JP¥45.6b falling due within a year, and liabilities of JP¥18.9b due beyond that. On the other hand, it had cash of JP¥70.4b and JP¥35.5b worth of receivables due within a year. So it actually has JP¥41.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Tokyo Ohka Kogyo could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tokyo Ohka Kogyo boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Tokyo Ohka Kogyo has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tokyo Ohka Kogyo can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Tokyo Ohka Kogyo recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tokyo Ohka Kogyo has JP¥59.9b in net cash and a decent-looking balance sheet. So we don't have any problem with Tokyo Ohka Kogyo's use of debt. 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. For instance, we've identified 1 warning sign for Tokyo Ohka Kogyo that you should be aware of.

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.

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