Does Toyo Drilube (TSE:4976) Have A Healthy Balance Sheet?

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 note that Toyo Drilube Co., Ltd. (TSE:4976) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Toyo Drilube

How Much Debt Does Toyo Drilube Carry?

You can click the graphic below for the historical numbers, but it shows that Toyo Drilube had JP¥792.0m of debt in March 2024, down from JP¥886.0m, one year before. But it also has JP¥4.59b in cash to offset that, meaning it has JP¥3.79b net cash.

How Healthy Is Toyo Drilube's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Toyo Drilube had liabilities of JP¥1.62b due within 12 months and liabilities of JP¥728.0m due beyond that. On the other hand, it had cash of JP¥4.59b and JP¥1.36b worth of receivables due within a year. So it actually has JP¥3.60b more liquid assets than total liabilities.

This surplus liquidity suggests that Toyo Drilube's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Toyo Drilube has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Toyo Drilube grew its EBIT by 161% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Toyo Drilube 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Toyo Drilube has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Toyo Drilube actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Toyo Drilube has net cash of JP¥3.79b, as well as more liquid assets than liabilities. And we liked the look of last year's 161% year-on-year EBIT growth. So we don't think Toyo Drilube's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Toyo Drilube , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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