TIS (TSE:3626) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that TIS Inc. (TSE:3626) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TIS

What Is TIS's Debt?

As you can see below, at the end of September 2024, TIS had JP¥33.5b of debt, up from JP¥24.4b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥103.7b in cash, so it actually has JP¥70.2b net cash.

How Strong Is TIS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TIS had liabilities of JP¥133.7b due within 12 months and liabilities of JP¥51.9b due beyond that. On the other hand, it had cash of JP¥103.7b and JP¥132.1b worth of receivables due within a year. So it can boast JP¥50.2b more liquid assets than total liabilities.

This short term liquidity is a sign that TIS could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TIS has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that TIS has increased its EBIT by 3.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TIS'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. TIS 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 most recent three years, TIS recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case TIS has JP¥70.2b in net cash and a decent-looking balance sheet. So is TIS's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in TIS, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.