Techno Quartz (TYO:5217) Could Easily Take On More Debt

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, Techno Quartz Inc. (TYO:5217) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Techno Quartz

How Much Debt Does Techno Quartz Carry?

As you can see below, at the end of September 2020, Techno Quartz had JP¥1.57b of debt, up from JP¥1.50b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥3.20b in cash, so it actually has JP¥1.63b net cash.

A Look At Techno Quartz's Liabilities

According to the last reported balance sheet, Techno Quartz had liabilities of JP¥2.75b due within 12 months, and liabilities of JP¥1.10b due beyond 12 months. Offsetting this, it had JP¥3.20b in cash and JP¥3.51b in receivables that were due within 12 months. So it actually has JP¥2.86b more liquid assets than total liabilities.

This short term liquidity is a sign that Techno Quartz could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Techno Quartz has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Techno Quartz grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. 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 Techno Quartz will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Techno Quartz 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. In the last three years, Techno Quartz's free cash flow amounted to 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Techno Quartz has net cash of JP¥1.63b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 22% over the last year. So is Techno Quartz's debt a risk? It doesn't seem so to us. 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 example, we've discovered 1 warning sign for Techno Quartz that you should be aware of before investing here.

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. 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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