Does Daito Trust ConstructionLtd (TSE:1878) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Daito Trust Construction Co.,Ltd. (TSE:1878) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Daito Trust ConstructionLtd

How Much Debt Does Daito Trust ConstructionLtd Carry?

The image below, which you can click on for greater detail, shows that Daito Trust ConstructionLtd had debt of JP¥71.1b at the end of December 2024, a reduction from JP¥82.2b over a year. However, its balance sheet shows it holds JP¥172.2b in cash, so it actually has JP¥101.1b net cash.

How Strong Is Daito Trust ConstructionLtd's Balance Sheet?

The latest balance sheet data shows that Daito Trust ConstructionLtd had liabilities of JP¥318.9b due within a year, and liabilities of JP¥304.1b falling due after that. Offsetting this, it had JP¥172.2b in cash and JP¥197.9b in receivables that were due within 12 months. So it has liabilities totalling JP¥253.0b more than its cash and near-term receivables, combined.

Daito Trust ConstructionLtd has a market capitalization of JP¥1.02t, 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, Daito Trust ConstructionLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Daito Trust ConstructionLtd has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Daito Trust ConstructionLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Daito Trust ConstructionLtd 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, Daito Trust ConstructionLtd produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Daito Trust ConstructionLtd does have more liabilities than liquid assets, it also has net cash of JP¥101.1b. And we liked the look of last year's 20% year-on-year EBIT growth. So is Daito Trust ConstructionLtd's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Daito Trust ConstructionLtd's dividend history, without delay!

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.