Techno Alpha (TSE:3089) Seems To Use Debt Quite Sensibly

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.' 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 Techno Alpha Co., Ltd. (TSE:3089) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Techno Alpha's Debt?

As you can see below, at the end of May 2025, Techno Alpha had JP¥450.0m of debt, up from JP¥300.0m a year ago. Click the image for more detail. However, it does have JP¥693.0m in cash offsetting this, leading to net cash of JP¥243.0m.

How Healthy Is Techno Alpha's Balance Sheet?

According to the last reported balance sheet, Techno Alpha had liabilities of JP¥940.0m due within 12 months, and liabilities of JP¥143.0m due beyond 12 months. Offsetting this, it had JP¥693.0m in cash and JP¥634.0m in receivables that were due within 12 months. So it actually has JP¥244.0m more liquid assets than total liabilities.

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

Check out our latest analysis for Techno Alpha

Better yet, Techno Alpha grew its EBIT by 111% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Techno Alpha will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Techno Alpha 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, Techno Alpha burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Techno Alpha has JP¥243.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 111% year-on-year EBIT growth. So we are not troubled with Techno Alpha's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Techno Alpha (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.