Is TOP CULTURELtd (TSE:7640) Using Debt 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that TOP CULTURE Co.,Ltd. (TSE:7640) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Why Does Debt Bring Risk?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is TOP CULTURELtd's Net Debt?

As you can see below, TOP CULTURELtd had JP¥6.55b of debt at July 2025, down from JP¥6.84b a year prior. However, it also had JP¥952.0m in cash, and so its net debt is JP¥5.60b.

How Healthy Is TOP CULTURELtd's Balance Sheet?

The latest balance sheet data shows that TOP CULTURELtd had liabilities of JP¥9.22b due within a year, and liabilities of JP¥4.17b falling due after that. Offsetting this, it had JP¥952.0m in cash and JP¥611.0m in receivables that were due within 12 months. So it has liabilities totalling JP¥11.8b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥3.20b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, TOP CULTURELtd would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TOP CULTURELtd 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.

See our latest analysis for TOP CULTURELtd

In the last year TOP CULTURELtd had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to JP¥18b. That's not what we would hope to see.

Caveat Emptor

Importantly, TOP CULTURELtd had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping JP¥421m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost JP¥739m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. We've identified 3 warning signs with TOP CULTURELtd (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.