Does TBCSCAT (TYO:3974) 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.' 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. As with many other companies TBCSCAT Inc. (TYO:3974) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for TBCSCAT

What Is TBCSCAT's Net Debt?

As you can see below, at the end of October 2020, TBCSCAT had JP¥672.0m of debt, up from JP¥486.0m a year ago. Click the image for more detail. But on the other hand it also has JP¥1.57b in cash, leading to a JP¥902.0m net cash position.

How Healthy Is TBCSCAT's Balance Sheet?

The latest balance sheet data shows that TBCSCAT had liabilities of JP¥674.0m due within a year, and liabilities of JP¥790.0m falling due after that. Offsetting these obligations, it had cash of JP¥1.57b as well as receivables valued at JP¥236.0m due within 12 months. So it can boast JP¥346.0m more liquid assets than total liabilities.

This excess liquidity suggests that TBCSCAT is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that TBCSCAT has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact TBCSCAT's saving grace is its low debt levels, because its EBIT has tanked 46% in the last twelve months. 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 it is TBCSCAT's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. TBCSCAT 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. During the last three years, TBCSCAT produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TBCSCAT has net cash of JP¥902.0m, as well as more liquid assets than liabilities. So we are not troubled with TBCSCAT's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for TBCSCAT you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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