Toshiba Tec (TSE:6588) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Toshiba Tec Corporation (TSE:6588) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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 Toshiba Tec

How Much Debt Does Toshiba Tec Carry?

As you can see below, at the end of December 2024, Toshiba Tec had JP¥21.8b of debt, up from JP¥14.8b a year ago. Click the image for more detail. However, it does have JP¥43.7b in cash offsetting this, leading to net cash of JP¥21.9b.

A Look At Toshiba Tec's Liabilities

According to the last reported balance sheet, Toshiba Tec had liabilities of JP¥170.8b due within 12 months, and liabilities of JP¥64.7b due beyond 12 months. On the other hand, it had cash of JP¥43.7b and JP¥78.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥113.1b.

This deficit is considerable relative to its market capitalization of JP¥168.1b, so it does suggest shareholders should keep an eye on Toshiba Tec's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Toshiba Tec also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Toshiba Tec grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Toshiba Tec can strengthen its balance sheet over time. 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 barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While Toshiba Tec does have more liabilities than liquid assets, it also has net cash of JP¥21.9b. And we liked the look of last year's 32% year-on-year EBIT growth. So we don't have any problem with Toshiba Tec's use of debt. 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. Be aware that Toshiba Tec is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.