Would Tecnisco (TSE:2962) Be Better Off With Less Debt?

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. Importantly, Tecnisco, Ltd. (TSE:2962) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tecnisco

How Much Debt Does Tecnisco Carry?

As you can see below, Tecnisco had JP¥3.43b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has JP¥1.61b in cash leading to net debt of about JP¥1.82b.

A Look At Tecnisco's Liabilities

Zooming in on the latest balance sheet data, we can see that Tecnisco had liabilities of JP¥1.62b due within 12 months and liabilities of JP¥2.50b due beyond that. Offsetting these obligations, it had cash of JP¥1.61b as well as receivables valued at JP¥1.37b due within 12 months. So its liabilities total JP¥1.15b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Tecnisco has a market capitalization of JP¥3.36b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tecnisco will need earnings to service that debt. 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.

Over 12 months, Tecnisco made a loss at the EBIT level, and saw its revenue drop to JP¥4.3b, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

Not only did Tecnisco's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping JP¥675m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled JP¥817m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Tecnisco (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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.