Health Check: How Prudently Does Tokyo Board Industries (TSE:7815) Use Debt?

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.' 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 Tokyo Board Industries Co., Ltd. (TSE:7815) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tokyo Board Industries

What Is Tokyo Board Industries's Debt?

The chart below, which you can click on for greater detail, shows that Tokyo Board Industries had JP¥7.43b in debt in September 2024; about the same as the year before. However, it does have JP¥2.14b in cash offsetting this, leading to net debt of about JP¥5.29b.

How Healthy Is Tokyo Board Industries' Balance Sheet?

We can see from the most recent balance sheet that Tokyo Board Industries had liabilities of JP¥6.41b falling due within a year, and liabilities of JP¥3.42b due beyond that. Offsetting this, it had JP¥2.14b in cash and JP¥1.87b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥5.82b.

The deficiency here weighs heavily on the JP¥1.68b 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'd watch its balance sheet closely, without a doubt. At the end of the day, Tokyo Board Industries 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 you can't view debt in total isolation; since Tokyo Board Industries 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.

In the last year Tokyo Board Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 9.6%, to JP¥7.8b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Tokyo Board Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥409m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through JP¥20m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Tokyo Board Industries (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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.