Here's Why Toho (TSE:9602) Can Manage Its Debt Responsibly

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Toho Co., Ltd. (TSE:9602) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Toho's Debt?

The image below, which you can click on for greater detail, shows that Toho had debt of JP¥1.83b at the end of May 2025, a reduction from JP¥22.8b over a year. However, it does have JP¥88.6b in cash offsetting this, leading to net cash of JP¥86.8b.

How Healthy Is Toho's Balance Sheet?

We can see from the most recent balance sheet that Toho had liabilities of JP¥92.8b falling due within a year, and liabilities of JP¥72.0b due beyond that. Offsetting these obligations, it had cash of JP¥88.6b as well as receivables valued at JP¥72.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥3.94b.

This state of affairs indicates that Toho's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥1.64t company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Toho also has more cash than debt, so we're pretty confident it can manage its debt safely.

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On the other hand, Toho saw its EBIT drop by 9.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder 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 Toho 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Toho 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. Looking at the most recent three years, Toho recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Toho has JP¥86.8b in net cash. So we are not troubled with Toho's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Toho's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.