Is Daiwabo Holdings (TSE:3107) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Daiwabo Holdings Co., Ltd. (TSE:3107) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Daiwabo Holdings Carry?

As you can see below, Daiwabo Holdings had JP¥20.4b of debt, at September 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥50.0b in cash offsetting this, leading to net cash of JP¥29.6b.

A Look At Daiwabo Holdings' Liabilities

We can see from the most recent balance sheet that Daiwabo Holdings had liabilities of JP¥278.7b falling due within a year, and liabilities of JP¥14.8b due beyond that. Offsetting this, it had JP¥50.0b in cash and JP¥274.5b in receivables that were due within 12 months. So it can boast JP¥31.1b more liquid assets than total liabilities.

This surplus suggests that Daiwabo Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Daiwabo Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Daiwabo Holdings

In addition to that, we're happy to report that Daiwabo Holdings has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Daiwabo Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Daiwabo Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Daiwabo Holdings recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Daiwabo Holdings has JP¥29.6b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 38% over the last year. So we don't think Daiwabo Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Daiwabo Holdings (2 don't sit too well with us!) that you should be aware of before investing here.

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.

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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.