TORICO (TSE:7138) Has Debt But No Earnings; Should You Worry?

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. We can see that TORICO Co., Ltd. (TSE:7138) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 TORICO

What Is TORICO's Debt?

You can click the graphic below for the historical numbers, but it shows that TORICO had JP¥388.0m of debt in June 2024, down from JP¥495.0m, one year before. But it also has JP¥807.0m in cash to offset that, meaning it has JP¥419.0m net cash.

A Look At TORICO's Liabilities

According to the last reported balance sheet, TORICO had liabilities of JP¥599.0m due within 12 months, and liabilities of JP¥242.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥807.0m as well as receivables valued at JP¥213.0m due within 12 months. So it can boast JP¥179.0m more liquid assets than total liabilities.

This surplus suggests that TORICO has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, TORICO boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year TORICO had a loss before interest and tax, and actually shrunk its revenue by 20%, to JP¥3.9b. That makes us nervous, to say the least.

So How Risky Is TORICO?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that TORICO had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥274m and booked a JP¥325m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥419.0m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for TORICO (of which 2 shouldn't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.