Tokyo KisenLtd (TSE:9193) Has A Rock Solid Balance Sheet

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.' 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 can see that Tokyo Kisen Co.,Ltd. (TSE:9193) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tokyo KisenLtd

What Is Tokyo KisenLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Tokyo KisenLtd had JP¥2.17b of debt, an increase on JP¥1.71b, over one year. However, its balance sheet shows it holds JP¥7.70b in cash, so it actually has JP¥5.53b net cash.

A Look At Tokyo KisenLtd's Liabilities

According to the last reported balance sheet, Tokyo KisenLtd had liabilities of JP¥3.35b due within 12 months, and liabilities of JP¥3.16b due beyond 12 months. Offsetting these obligations, it had cash of JP¥7.70b as well as receivables valued at JP¥1.93b due within 12 months. So it can boast JP¥3.13b more liquid assets than total liabilities.

This surplus strongly suggests that Tokyo KisenLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Tokyo KisenLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Tokyo KisenLtd has boosted its EBIT by 54%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tokyo KisenLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tokyo KisenLtd 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 last two years, Tokyo KisenLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tokyo KisenLtd has JP¥5.53b in net cash and a decent-looking balance sheet. And we liked the look of last year's 54% year-on-year EBIT growth. So we don't think Tokyo KisenLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Tokyo KisenLtd has 3 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.