Is Tri Chemical Laboratories (TSE:4369) A Risky Investment?

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. We note that Tri Chemical Laboratories Inc. (TSE:4369) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tri Chemical Laboratories

How Much Debt Does Tri Chemical Laboratories Carry?

As you can see below, Tri Chemical Laboratories had JP¥1.91b of debt at January 2024, down from JP¥2.70b a year prior. But on the other hand it also has JP¥10.5b in cash, leading to a JP¥8.59b net cash position.

A Look At Tri Chemical Laboratories' Liabilities

Zooming in on the latest balance sheet data, we can see that Tri Chemical Laboratories had liabilities of JP¥2.55b due within 12 months and liabilities of JP¥1.74b due beyond that. Offsetting this, it had JP¥10.5b in cash and JP¥4.04b in receivables that were due within 12 months. So it actually has JP¥10.2b more liquid assets than total liabilities.

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

It is just as well that Tri Chemical Laboratories's load is not too heavy, because its EBIT was down 44% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tri Chemical Laboratories can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tri Chemical Laboratories may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Tri Chemical Laboratories actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tri Chemical Laboratories has JP¥8.59b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.2b, being 104% of its EBIT. So we don't have any problem with Tri Chemical Laboratories's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Tri Chemical Laboratories has 2 warning signs we think you should be aware of.

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. 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.