Does Tamagawa Holdings (TSE:6838) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies Tamagawa Holdings Co., Ltd. (TSE:6838) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tamagawa Holdings

What Is Tamagawa Holdings's Net Debt?

As you can see below, at the end of June 2024, Tamagawa Holdings had JP¥3.17b of debt, up from JP¥2.28b a year ago. Click the image for more detail. However, because it has a cash reserve of JP¥992.0m, its net debt is less, at about JP¥2.18b.

A Look At Tamagawa Holdings' Liabilities

According to the last reported balance sheet, Tamagawa Holdings had liabilities of JP¥1.68b due within 12 months, and liabilities of JP¥2.90b due beyond 12 months. On the other hand, it had cash of JP¥992.0m and JP¥1.58b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥2.02b.

Tamagawa Holdings has a market capitalization of JP¥4.72b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tamagawa Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tamagawa Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to JP¥4.5b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Tamagawa Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at JP¥19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥1.2b of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 5 warning signs we've spotted with Tamagawa Holdings (including 3 which make us uncomfortable) .

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.