Does Toho Zinc (TSE:5707) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 Toho Zinc Co., Ltd. (TSE:5707) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Toho Zinc

What Is Toho Zinc's Debt?

You can click the graphic below for the historical numbers, but it shows that Toho Zinc had JP¥72.3b of debt in December 2023, down from JP¥80.4b, one year before. On the flip side, it has JP¥11.1b in cash leading to net debt of about JP¥61.2b.

How Healthy Is Toho Zinc's Balance Sheet?

The latest balance sheet data shows that Toho Zinc had liabilities of JP¥64.7b due within a year, and liabilities of JP¥30.0b falling due after that. Offsetting this, it had JP¥11.1b in cash and JP¥16.5b in receivables that were due within 12 months. So its liabilities total JP¥67.2b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the JP¥13.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Toho Zinc would probably need a major re-capitalization if its creditors were to demand repayment. 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 Toho Zinc 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.

Over 12 months, Toho Zinc made a loss at the EBIT level, and saw its revenue drop to JP¥133b, which is a fall of 6.5%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Toho Zinc produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping JP¥2.9b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost JP¥34b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's 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 2 warning signs with Toho Zinc , and understanding them should be part of your investment process.

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.