TOWA (TSE:6315) Has A Rock Solid Balance Sheet

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.' 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 should shareholders be worried about its use of debt?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does TOWA Carry?

You can click the graphic below for the historical numbers, but it shows that TOWA had JP¥12.2b of debt in September 2024, down from JP¥14.8b, one year before. But it also has JP¥21.2b in cash to offset that, meaning it has JP¥8.99b net cash.

How Strong Is TOWA's Balance Sheet?

The latest balance sheet data shows that TOWA had liabilities of JP¥21.2b due within a year, and liabilities of JP¥4.75b falling due after that. Offsetting this, it had JP¥21.2b in cash and JP¥12.5b in receivables that were due within 12 months. So it actually has JP¥7.75b more liquid assets than total liabilities.

This surplus suggests that TOWA has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that TOWA has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, TOWA grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine TOWA's ability to maintain a healthy balance sheet going forward. 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. 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. Looking at the most recent three years, TOWA recorded free cash flow of 36% 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 TOWA has JP¥8.99b in net cash and a decent-looking balance sheet. And we liked the look of last year's 76% year-on-year EBIT growth. So is TOWA's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that TOWA is showing 1 warning sign in our investment analysis , you should know about...

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.