The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, creates no bones about it when he declares ‘The largegest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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 Techno Alpha Co., Ltd. (TSE:3089) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having stated that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt toreceiveher.
What Is Techno Alpha’s Net Debt?
You can click the graphic below for the historical numbers, but it reveals that Techno Alpha had JP¥300.0m of debt in November 2025, down from JP¥510.0m, one year before. But on the other hand it also has JP¥725.0m in cash, leading to a JP¥425.0m net cash position.
How Healthy Is Techno Alpha’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Techno Alpha had liabilities of JP¥875.0m due within 12 months and liabilities of JP¥142.0m due beyond that. On the other hand, it had cash of JP¥725.0m and JP¥1.17b worth of receivables due within a year. So it can boast JP¥880.0m more liquid assets than total liabilities.
This surplus liquidity suggests that Techno Alpha’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. Having regard to this fact, we believe its balance sheet is as strong as an ox. Simply put, the fact that Techno Alpha has more cash than debt is arguably a good indication that it can manage its debt safely.
View our latest analysis for Techno Alpha
Even more impressive was the fact that Techno Alpha grew its EBIT by 113% over twelve months. If maintained that growth will create the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Techno Alpha’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth seeing at the earnings trfinish. Click here for an interactive snapshot.
Finally, a business necessarys free cash flow to pay off debt; accounting profits just don’t cut it. Techno Alpha may have net cash on the balance sheet, but it is still interesting to see at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, becaapply that will influence both its necessary for, and its capacity to manage debt. Over the last three years, Techno Alpha reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Techno Alpha has net cash of JP¥425.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 113% over the last year. So we don’t believe Techno Alpha’s apply 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. Case in point: We’ve spotted 1 warning sign for Techno Alpha 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.
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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 applying an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focapplyd 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.
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