Is TORICO (TSE:7138) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, TORICO Co., Ltd. (TSE:7138) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TORICO

What Is TORICO's Debt?

As you can see below, TORICO had JP¥442.0m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥620.0m in cash, so it actually has JP¥178.0m net cash.

How Strong Is TORICO's Balance Sheet?

The latest balance sheet data shows that TORICO had liabilities of JP¥698.0m due within a year, and liabilities of JP¥343.0m falling due after that. On the other hand, it had cash of JP¥620.0m and JP¥371.0m worth of receivables due within a year. So it has liabilities totalling JP¥50.0m more than its cash and near-term receivables, combined.

Given TORICO has a market capitalization of JP¥1.53b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, TORICO boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TORICO will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, TORICO made a loss at the EBIT level, and saw its revenue drop to JP¥4.2b, which is a fall of 16%. That's not what we would hope to see.

So How Risky Is TORICO?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that TORICO had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥249m of cash and made a loss of JP¥196m. Given it only has net cash of JP¥178.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for TORICO (2 are significant) you should be aware of.

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.