Toei Company (TSE:9605) Has A Rock Solid Balance Sheet

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. We can see that Toei Company, Ltd. (TSE:9605) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Toei Company Carry?

As you can see below, Toei Company had JP¥15.7b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥104.2b in cash to offset that, meaning it has JP¥88.5b net cash.

How Strong Is Toei Company's Balance Sheet?

According to the last reported balance sheet, Toei Company had liabilities of JP¥56.0b due within 12 months, and liabilities of JP¥42.0b due beyond 12 months. On the other hand, it had cash of JP¥104.2b and JP¥39.0b worth of receivables due within a year. So it can boast JP¥45.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Toei Company could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Toei Company boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Toei Company

Fortunately, Toei Company grew its EBIT by 9.9% in the last year, making that debt load look even more manageable. 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 Toei Company'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Toei Company 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. During the last three years, Toei Company produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Toei Company has JP¥88.5b in net cash and a decent-looking balance sheet. So we don't think Toei Company's use of debt is risky. 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 Toei Company's earnings per share history for free.

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.