We Think TDK (TSE:6762) Can Manage Its Debt With Ease

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, TDK Corporation (TSE:6762) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TDK

How Much Debt Does TDK Carry?

The image below, which you can click on for greater detail, shows that TDK had debt of JP¥607.4b at the end of September 2024, a reduction from JP¥712.4b over a year. However, it does have JP¥696.7b in cash offsetting this, leading to net cash of JP¥89.3b.

How Strong Is TDK's Balance Sheet?

The latest balance sheet data shows that TDK had liabilities of JP¥1.15t due within a year, and liabilities of JP¥632.7b falling due after that. Offsetting these obligations, it had cash of JP¥696.7b as well as receivables valued at JP¥591.0b due within 12 months. So it has liabilities totalling JP¥494.0b more than its cash and near-term receivables, combined.

Of course, TDK has a titanic market capitalization of JP¥3.49t, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, TDK boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that TDK has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. 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 TDK'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. TDK 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. Over the most recent three years, TDK recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although TDK'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¥89.3b. And we liked the look of last year's 65% year-on-year EBIT growth. So we don't think TDK's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in TDK, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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.