Does New Toyo International Holdings (SGX:N08) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that New Toyo International Holdings Ltd (SGX:N08) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for New Toyo International Holdings

How Much Debt Does New Toyo International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that New Toyo International Holdings had S$26.0m of debt in June 2022, down from S$28.4m, one year before. However, its balance sheet shows it holds S$35.0m in cash, so it actually has S$8.93m net cash.

How Healthy Is New Toyo International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that New Toyo International Holdings had liabilities of S$69.5m due within 12 months and liabilities of S$10.9m due beyond that. Offsetting this, it had S$35.0m in cash and S$61.9m in receivables that were due within 12 months. So it can boast S$16.5m more liquid assets than total liabilities.

This excess liquidity suggests that New Toyo International Holdings is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, New Toyo International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that New Toyo International Holdings has increased its EBIT by 3.5% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is New Toyo International Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. New Toyo International Holdings 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. Happily for any shareholders, New Toyo International Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case New Toyo International Holdings has S$8.93m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of S$7.2m, being 330% of its EBIT. So is New Toyo International Holdings's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 4 warning signs for New Toyo International Holdings (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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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.