These 4 Measures Indicate That Toshiba Tec (TSE:6588) Is Using Debt Extensively

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.' 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. We note that Toshiba Tec Corporation (TSE:6588) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Toshiba Tec

How Much Debt Does Toshiba Tec Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Toshiba Tec had JP¥18.1b of debt, an increase on JP¥4.36b, over one year. However, its balance sheet shows it holds JP¥48.6b in cash, so it actually has JP¥30.5b net cash.

How Strong Is Toshiba Tec's Balance Sheet?

We can see from the most recent balance sheet that Toshiba Tec had liabilities of JP¥175.8b falling due within a year, and liabilities of JP¥65.5b due beyond that. On the other hand, it had cash of JP¥48.6b and JP¥85.1b worth of receivables due within a year. So it has liabilities totalling JP¥107.6b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥165.4b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Toshiba Tec boasts net cash, so it's fair to say it does not have a heavy debt load!

Toshiba Tec's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Toshiba Tec'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 Toshiba Tec 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. Over the last three years, Toshiba Tec reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Toshiba Tec's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥30.5b. So although we see some areas for improvement, we're not too worried about Toshiba Tec's balance sheet. While Toshiba Tec didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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.