We Think Tokyo Seimitsu (TSE:7729) Can Stay On Top Of Its Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Tokyo Seimitsu Co., Ltd. (TSE:7729) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Tokyo Seimitsu's Net Debt?

As you can see below, Tokyo Seimitsu had JP¥17.8b of debt at June 2025, down from JP¥22.8b a year prior. But on the other hand it also has JP¥49.1b in cash, leading to a JP¥31.3b net cash position.

A Look At Tokyo Seimitsu's Liabilities

We can see from the most recent balance sheet that Tokyo Seimitsu had liabilities of JP¥43.1b falling due within a year, and liabilities of JP¥13.3b due beyond that. Offsetting this, it had JP¥49.1b in cash and JP¥35.0b in receivables that were due within 12 months. So it actually has JP¥27.8b more liquid assets than total liabilities.

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

Check out our latest analysis for Tokyo Seimitsu

Also positive, Tokyo Seimitsu grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tokyo Seimitsu's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tokyo Seimitsu 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, Tokyo Seimitsu reported free cash flow worth 14% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tokyo Seimitsu has JP¥31.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 20% year-on-year EBIT growth. So is Tokyo Seimitsu'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. For example - Tokyo Seimitsu has 2 warning signs 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.