These 4 Measures Indicate That TBS HoldingsInc (TSE:9401) Is Using Debt Extensively

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. We note that TBS Holdings,Inc. (TSE:9401) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 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 TBS HoldingsInc

What Is TBS HoldingsInc's Debt?

The image below, which you can click on for greater detail, shows that TBS HoldingsInc had debt of JP¥3.78b at the end of March 2024, a reduction from JP¥20.0b over a year. But on the other hand it also has JP¥43.7b in cash, leading to a JP¥40.0b net cash position.

A Look At TBS HoldingsInc's Liabilities

The latest balance sheet data shows that TBS HoldingsInc had liabilities of JP¥95.0b due within a year, and liabilities of JP¥322.6b falling due after that. On the other hand, it had cash of JP¥43.7b and JP¥74.2b worth of receivables due within a year. So it has liabilities totalling JP¥299.6b more than its cash and near-term receivables, combined.

TBS HoldingsInc has a market capitalization of JP¥697.7b, so it could very likely raise cash to ameliorate 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.

It is just as well that TBS HoldingsInc's load is not too heavy, because its EBIT was down 27% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TBS HoldingsInc's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TBS HoldingsInc has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, TBS HoldingsInc burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While TBS HoldingsInc does have more liabilities than liquid assets, it also has net cash of JP¥40.0b. Despite the cash, we do find TBS HoldingsInc's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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. Be aware that TBS HoldingsInc is showing 1 warning sign in our investment analysis , 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.

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