Does Toyo Tire (TSE:5105) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Toyo Tire Corporation (TSE:5105) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Toyo Tire Carry?

As you can see below, Toyo Tire had JP¥73.3b of debt at September 2025, down from JP¥86.6b a year prior. But on the other hand it also has JP¥77.1b in cash, leading to a JP¥3.86b net cash position.

How Strong Is Toyo Tire's Balance Sheet?

According to the last reported balance sheet, Toyo Tire had liabilities of JP¥134.4b due within 12 months, and liabilities of JP¥83.8b due beyond 12 months. Offsetting these obligations, it had cash of JP¥77.1b as well as receivables valued at JP¥136.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥5.04b.

This state of affairs indicates that Toyo Tire's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥667.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Toyo Tire also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Toyo Tire

But the bad news is that Toyo Tire has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Toyo Tire's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Toyo Tire has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Toyo Tire produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Toyo Tire has JP¥3.86b in net cash. So we are not troubled with Toyo Tire's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Toyo Tire that you should be aware of.

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.