Techfirm Holdings (TSE:3625) Has A Pretty Healthy 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. We note that Techfirm Holdings Inc. (TSE:3625) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Techfirm Holdings

How Much Debt Does Techfirm Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Techfirm Holdings had JP¥1.10b of debt, an increase on JP¥502.0m, over one year. However, its balance sheet shows it holds JP¥2.55b in cash, so it actually has JP¥1.45b net cash.

A Look At Techfirm Holdings' Liabilities

We can see from the most recent balance sheet that Techfirm Holdings had liabilities of JP¥1.76b falling due within a year, and liabilities of JP¥34.0m due beyond that. Offsetting this, it had JP¥2.55b in cash and JP¥700.0m in receivables that were due within 12 months. So it actually has JP¥1.46b more liquid assets than total liabilities.

This luscious liquidity implies that Techfirm Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Techfirm Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Techfirm Holdings made a loss at the EBIT level, last year, it was also good to see that it generated JP¥26m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Techfirm Holdings'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Techfirm Holdings 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 year, Techfirm Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Techfirm Holdings has JP¥1.45b in net cash and a decent-looking balance sheet. So we are not troubled with Techfirm Holdings's debt use. 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 Techfirm Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.