We Think DAIWA TSUSHIN (TSE:7116) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, DAIWA TSUSHIN Co., Ltd (TSE:7116) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 DAIWA TSUSHIN

What Is DAIWA TSUSHIN's Debt?

As you can see below, DAIWA TSUSHIN had JP¥724.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had JP¥575.0m in cash, and so its net debt is JP¥149.0m.

How Healthy Is DAIWA TSUSHIN's Balance Sheet?

We can see from the most recent balance sheet that DAIWA TSUSHIN had liabilities of JP¥676.0m falling due within a year, and liabilities of JP¥530.0m due beyond that. Offsetting these obligations, it had cash of JP¥575.0m as well as receivables valued at JP¥584.0m due within 12 months. So its liabilities total JP¥47.0m more than the combination of its cash and short-term receivables.

Having regard to DAIWA TSUSHIN's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥2.72b company is struggling for cash, we still think it's worth monitoring its balance sheet.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

DAIWA TSUSHIN has a low net debt to EBITDA ratio of only 0.37. And its EBIT easily covers its interest expense, being 58.3 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. While DAIWA TSUSHIN doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DAIWA TSUSHIN will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, DAIWA TSUSHIN created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

DAIWA TSUSHIN's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that DAIWA TSUSHIN can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for DAIWA TSUSHIN you should be aware of, and 1 of them is concerning.

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.