Does TOWA (TSE:6315) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 TOWA Corporation (TSE:6315) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TOWA

What Is TOWA's Debt?

The image below, which you can click on for greater detail, shows that TOWA had debt of JP¥13.8b at the end of December 2023, a reduction from JP¥14.6b over a year. But on the other hand it also has JP¥18.7b in cash, leading to a JP¥4.86b net cash position.

A Look At TOWA's Liabilities

We can see from the most recent balance sheet that TOWA had liabilities of JP¥20.2b falling due within a year, and liabilities of JP¥5.61b due beyond that. Offsetting these obligations, it had cash of JP¥18.7b as well as receivables valued at JP¥9.39b due within 12 months. So it actually has JP¥2.23b more liquid assets than total liabilities.

This state of affairs indicates that TOWA's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥246.0b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that TOWA has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that TOWA's load is not too heavy, because its EBIT was down 34% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 TOWA 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. TOWA 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. In the last three years, TOWA's free cash flow amounted to 31% 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 TOWA has net cash of JP¥4.86b, as well as more liquid assets than liabilities. So we don't have any problem with TOWA'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 - TOWA has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.