Is Daito Trust ConstructionLtd (TSE:1878) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Daito Trust Construction Co.,Ltd. (TSE:1878) does have debt on its balance sheet. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Daito Trust ConstructionLtd's Debt?

As you can see below, at the end of March 2025, Daito Trust ConstructionLtd had JP¥123.6b of debt, up from JP¥79.2b a year ago. Click the image for more detail. But on the other hand it also has JP¥238.9b in cash, leading to a JP¥115.3b net cash position.

How Strong Is Daito Trust ConstructionLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Daito Trust ConstructionLtd had liabilities of JP¥410.8b due within 12 months and liabilities of JP¥344.5b due beyond that. Offsetting this, it had JP¥238.9b in cash and JP¥177.8b in receivables that were due within 12 months. So its liabilities total JP¥338.7b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Daito Trust ConstructionLtd has a market capitalization of JP¥1.04t, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Daito Trust ConstructionLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Daito Trust ConstructionLtd

And we also note warmly that Daito Trust ConstructionLtd grew its EBIT by 13% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Daito Trust ConstructionLtd 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 most recent three years, Daito Trust ConstructionLtd recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Daito Trust ConstructionLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥115.3b. And it also grew its EBIT by 13% over the last year. So we are not troubled with Daito Trust ConstructionLtd's debt use. Given Daito Trust ConstructionLtd has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.