TENTIAL (TSE:325A) Seems To Use Debt Quite Sensibly

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. Importantly, TENTIAL Inc. (TSE:325A) does carry debt. But should shareholders be worried about its use of debt?

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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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does TENTIAL Carry?

You can click the graphic below for the historical numbers, but it shows that TENTIAL had JP¥407.0m of debt in August 2025, down from JP¥1.27b, one year before. However, its balance sheet shows it holds JP¥4.33b in cash, so it actually has JP¥3.92b net cash.

How Healthy Is TENTIAL's Balance Sheet?

The latest balance sheet data shows that TENTIAL had liabilities of JP¥2.52b due within a year, and liabilities of JP¥364.0m falling due after that. Offsetting this, it had JP¥4.33b in cash and JP¥384.0m in receivables that were due within 12 months. So it can boast JP¥1.83b more liquid assets than total liabilities.

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

View our latest analysis for TENTIAL

Even more impressive was the fact that TENTIAL grew its EBIT by 117% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 TENTIAL 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TENTIAL 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 last three years, TENTIAL recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case TENTIAL has JP¥3.92b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 117% over the last year. So we don't have any problem with TENTIAL's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with TENTIAL , and understanding them should be part of your investment process.

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.