Would Tokyo Communications GroupInc (TSE:7359) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tokyo Communications Group,Inc. (TSE:7359) does use debt in its business. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tokyo Communications GroupInc

What Is Tokyo Communications GroupInc's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Tokyo Communications GroupInc had JP¥2.06b of debt, an increase on JP¥1.88b, over one year. However, it also had JP¥967.0m in cash, and so its net debt is JP¥1.10b.

How Strong Is Tokyo Communications GroupInc's Balance Sheet?

The latest balance sheet data shows that Tokyo Communications GroupInc had liabilities of JP¥1.60b due within a year, and liabilities of JP¥1.59b falling due after that. Offsetting these obligations, it had cash of JP¥967.0m as well as receivables valued at JP¥621.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.60b.

While this might seem like a lot, it is not so bad since Tokyo Communications GroupInc has a market capitalization of JP¥3.19b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tokyo Communications GroupInc wasn't profitable at an EBIT level, but managed to grow its revenue by 7.3%, to JP¥6.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Tokyo Communications GroupInc produced an earnings before interest and tax (EBIT) loss. Indeed, it lost JP¥315m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥110m of cash over the last year. So to be blunt we think it is 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Tokyo Communications GroupInc (of which 1 is a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.