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 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. As with many other companies Tokyo Ohka Kogyo Co., Ltd. (TSE:4186) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
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 2025; about the same as the year before. However, it does have JP¥51.9b in cash offsetting this, leading to net cash of JP¥41.4b.
How Strong Is Tokyo Ohka Kogyo's Balance Sheet?
The latest balance sheet data shows that Tokyo Ohka Kogyo had liabilities of JP¥55.5b due within a year, and liabilities of JP¥12.7b falling due after that. On the other hand, it had cash of JP¥51.9b and JP¥41.1b worth of receivables due within a year. So it can boast JP¥24.8b 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!
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On top of that, Tokyo Ohka Kogyo grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tokyo Ohka Kogyo can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
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. In the last three years, Tokyo Ohka Kogyo created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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¥41.4b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 61% over the last year. So we don't think Tokyo Ohka Kogyo's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Tokyo Ohka Kogyo, 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.
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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.