Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Techno Quartz Inc. (TYO:5217) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Techno Quartz
What Is Techno Quartz's Debt?
As you can see below, Techno Quartz had JPĀ„1.50b of debt at December 2020, down from JPĀ„2.02b a year prior. But it also has JPĀ„3.11b in cash to offset that, meaning it has JPĀ„1.61b net cash.
How Healthy Is Techno Quartz's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Techno Quartz had liabilities of JPĀ„2.68b due within 12 months and liabilities of JPĀ„1.08b due beyond that. On the other hand, it had cash of JPĀ„3.11b and JPĀ„3.62b worth of receivables due within a year. So it can boast JPĀ„2.98b more liquid assets than total liabilities.
This surplus suggests that Techno Quartz has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Techno Quartz boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Techno Quartz has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 39% 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 JPĀ„1.61b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 61% over the last year. So we don't think Techno Quartz's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Techno Quartz's earnings per share history for free.
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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About TSE:5217
Techno Quartz
Provides high-precision quartz glass, silicon, and ceramic products primarily for use in semiconductor and liquid crystal display manufacturing equipment, and laboratory instruments in Japan.
Flawless balance sheet with proven track record and pays a dividend.
