Is Dai Nippon Toryo Company (TSE:4611) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dai Nippon Toryo Company, Limited (TSE:4611) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

How Much Debt Does Dai Nippon Toryo Company Carry?

You can click the graphic below for the historical numbers, but it shows that Dai Nippon Toryo Company had JP¥6.30b of debt in December 2024, down from JP¥7.10b, one year before. However, it does have JP¥8.77b in cash offsetting this, leading to net cash of JP¥2.47b.

How Healthy Is Dai Nippon Toryo Company's Balance Sheet?

According to the last reported balance sheet, Dai Nippon Toryo Company had liabilities of JP¥29.0b due within 12 months, and liabilities of JP¥11.2b due beyond 12 months. Offsetting these obligations, it had cash of JP¥8.77b as well as receivables valued at JP¥19.5b due within 12 months. So its liabilities total JP¥11.9b more than the combination of its cash and short-term receivables.

Dai Nippon Toryo Company has a market capitalization of JP¥32.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Dai Nippon Toryo Company also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Dai Nippon Toryo Company

Dai Nippon Toryo Company's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dai Nippon Toryo Company will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Dai Nippon Toryo Company 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. Considering the last three years, Dai Nippon Toryo Company actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While Dai Nippon Toryo Company does have more liabilities than liquid assets, it also has net cash of JP¥2.47b. So we don't have any problem with Dai Nippon Toryo Company's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Dai Nippon Toryo Company you should know about.

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.