We Think TBS HoldingsInc (TSE:9401) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, TBS Holdings,Inc. (TSE:9401) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TBS HoldingsInc

How Much Debt Does TBS HoldingsInc Carry?

As you can see below, TBS HoldingsInc had JP¥3.88b of debt at December 2023, down from JP¥25.0b a year prior. But on the other hand it also has JP¥40.4b in cash, leading to a JP¥36.5b net cash position.

A Look At TBS HoldingsInc's Liabilities

According to the last reported balance sheet, TBS HoldingsInc had liabilities of JP¥87.5b due within 12 months, and liabilities of JP¥247.4b due beyond 12 months. On the other hand, it had cash of JP¥40.4b and JP¥78.4b worth of receivables due within a year. So its liabilities total JP¥216.2b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since TBS HoldingsInc has a market capitalization of JP¥777.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, TBS HoldingsInc boasts net cash, so it's fair to say it does not have a heavy debt load!

While TBS HoldingsInc doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While TBS HoldingsInc does have more liabilities than liquid assets, it also has net cash of JP¥36.5b. So we don't have any problem with TBS HoldingsInc's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TBS HoldingsInc is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.