These 4 Measures Indicate That Tri Chemical Laboratories (TSE:4369) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Tri Chemical Laboratories Inc. (TSE:4369) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Tri Chemical Laboratories Carry?

You can click the graphic below for the historical numbers, but it shows that Tri Chemical Laboratories had JP¥1.21b of debt in April 2025, down from JP¥1.92b, one year before. But on the other hand it also has JP¥7.99b in cash, leading to a JP¥6.78b net cash position.

How Strong Is Tri Chemical Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Tri Chemical Laboratories had liabilities of JP¥6.51b falling due within a year, and liabilities of JP¥978.2m due beyond that. Offsetting this, it had JP¥7.99b in cash and JP¥5.96b in receivables that were due within 12 months. So it can boast JP¥6.47b 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.

See our latest analysis for Tri Chemical Laboratories

Even more impressive was the fact that Tri Chemical Laboratories grew its EBIT by 263% over twelve months. That boost will make it even easier to pay down debt going forward. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Tri Chemical Laboratories recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tri Chemical Laboratories has JP¥6.78b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 263% over the last year. So we don't think Tri Chemical Laboratories's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Tri Chemical Laboratories .

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.