These 4 Measures Indicate That Tokuden (TSE:3437) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Tokuden Co., Ltd. (TSE:3437) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Tokuden Carry?

You can click the graphic below for the historical numbers, but it shows that Tokuden had JP¥1.23b of debt in September 2025, down from JP¥1.33b, one year before. However, it does have JP¥1.56b in cash offsetting this, leading to net cash of JP¥324.0m.

How Healthy Is Tokuden's Balance Sheet?

According to the last reported balance sheet, Tokuden had liabilities of JP¥2.34b due within 12 months, and liabilities of JP¥1.20b due beyond 12 months. On the other hand, it had cash of JP¥1.56b and JP¥4.20b worth of receivables due within a year. So it can boast JP¥2.23b more liquid assets than total liabilities.

This luscious liquidity implies that Tokuden's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Tokuden boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Tokuden

In addition to that, we're happy to report that Tokuden has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Tokuden'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tokuden 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 three years, Tokuden 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 Tokuden has JP¥324.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 37% over the last year. So we don't think Tokuden's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Tokuden has 4 warning signs (and 2 which are concerning) we think you should know about.

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.