Is TBS HoldingsInc (TSE:9401) A Risky Investment?

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.' 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. Importantly, TBS Holdings,Inc. (TSE:9401) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does TBS HoldingsInc Carry?

The image below, which you can click on for greater detail, shows that at December 2024 TBS HoldingsInc had debt of JP¥13.4b, up from JP¥3.88b in one year. However, it does have JP¥60.1b in cash offsetting this, leading to net cash of JP¥46.7b.

How Healthy Is TBS HoldingsInc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TBS HoldingsInc had liabilities of JP¥96.2b due within 12 months and liabilities of JP¥278.8b due beyond that. On the other hand, it had cash of JP¥60.1b and JP¥85.2b worth of receivables due within a year. So it has liabilities totalling JP¥229.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because TBS HoldingsInc is worth JP¥626.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, TBS HoldingsInc also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for TBS HoldingsInc

And we also note warmly that TBS HoldingsInc grew its EBIT by 15% last year, making its debt load easier to handle. 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 TBS HoldingsInc can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TBS HoldingsInc may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, TBS HoldingsInc recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although TBS HoldingsInc's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥46.7b. And it also grew its EBIT by 15% over the last year. So we are not troubled with TBS HoldingsInc's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for TBS HoldingsInc that you should be aware of before investing here.

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.