We Think Daito Trust ConstructionLtd (TSE:1878) Can Stay On Top Of Its Debt

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.' 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 can see that Daito Trust Construction Co.,Ltd. (TSE:1878) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Daito Trust ConstructionLtd

What Is Daito Trust ConstructionLtd's Debt?

The image below, which you can click on for greater detail, shows that Daito Trust ConstructionLtd had debt of JP¥79.2b at the end of March 2024, a reduction from JP¥91.0b over a year. But on the other hand it also has JP¥249.6b in cash, leading to a JP¥170.4b 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¥326.9b due within 12 months and liabilities of JP¥347.3b due beyond that. Offsetting these obligations, it had cash of JP¥249.6b as well as receivables valued at JP¥162.3b due within 12 months. So its liabilities total JP¥262.5b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Daito Trust ConstructionLtd is worth JP¥1.09t, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

The good news is that Daito Trust ConstructionLtd has increased its EBIT by 4.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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¥170.4b. And it impressed us with free cash flow of JP¥71b, being 72% of its EBIT. 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!

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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