Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Tecnisco, Ltd. (TSE:2962) makes use of debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Tecnisco
What Is Tecnisco's Net Debt?
The image below, which you can click on for greater detail, shows that Tecnisco had debt of JPĀ„2.90b at the end of March 2024, a reduction from JPĀ„3.32b over a year. However, it also had JPĀ„1.49b in cash, and so its net debt is JPĀ„1.42b.
A Look At Tecnisco's Liabilities
The latest balance sheet data shows that Tecnisco had liabilities of JPĀ„1.87b due within a year, and liabilities of JPĀ„1.93b falling due after that. On the other hand, it had cash of JPĀ„1.49b and JPĀ„1.48b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JPĀ„831.0m.
Given Tecnisco has a market capitalization of JPĀ„5.60b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tecnisco'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.
In the last year Tecnisco had a loss before interest and tax, and actually shrunk its revenue by 8.2%, to JPĀ„4.9b. We would much prefer see growth.
Caveat Emptor
Importantly, Tecnisco had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost JPĀ„284m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of JPĀ„146m into a profit. So to be blunt we do think it is risky. 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, we've discovered 2 warning signs for Tecnisco that you should be aware of before investing here.
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.
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About TSE:2962
Tecnisco
Manufactures and sells precision components for optoelectronics, electronics, and life science industries in Japan.
Mediocre balance sheet low.
