Here's Why Tokyo Communications GroupInc (TSE:7359) Can Afford Some 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.' 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. As with many other companies Tokyo Communications Group,Inc. (TSE:7359) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tokyo Communications GroupInc

How Much Debt Does Tokyo Communications GroupInc Carry?

The chart below, which you can click on for greater detail, shows that Tokyo Communications GroupInc had JP¥1.91b in debt in September 2024; about the same as the year before. However, because it has a cash reserve of JP¥826.0m, its net debt is less, at about JP¥1.09b.

A Look At Tokyo Communications GroupInc's Liabilities

Zooming in on the latest balance sheet data, we can see that Tokyo Communications GroupInc had liabilities of JP¥1.54b due within 12 months and liabilities of JP¥1.47b due beyond that. On the other hand, it had cash of JP¥826.0m and JP¥558.0m worth of receivables due within a year. So it has liabilities totalling JP¥1.62b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥2.58b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tokyo Communications GroupInc's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Tokyo Communications GroupInc made a loss at the EBIT level, and saw its revenue drop to JP¥5.8b, which is a fall of 4.2%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Tokyo Communications GroupInc produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable JP¥364m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through JP¥110m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. We've identified 3 warning signs with Tokyo Communications GroupInc (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

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.