These 4 Measures Indicate That Sakuma Exports (NSE:SAKUMA) Is Using Debt Reasonably Well

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.' 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 can see that Sakuma Exports Limited (NSE:SAKUMA) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Sakuma Exports

What Is Sakuma Exports's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Sakuma Exports had debt of ₹132.4m, up from ₹18.3m in one year. But on the other hand it also has ₹1.90b in cash, leading to a ₹1.76b net cash position.

How Strong Is Sakuma Exports' Balance Sheet?

We can see from the most recent balance sheet that Sakuma Exports had liabilities of ₹5.98b falling due within a year, and liabilities of ₹59.3m due beyond that. Offsetting this, it had ₹1.90b in cash and ₹5.99b in receivables that were due within 12 months. So it can boast ₹1.84b more liquid assets than total liabilities.

This excess liquidity is a great indication that Sakuma Exports' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Sakuma Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Sakuma Exports if management cannot prevent a repeat of the 26% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sakuma Exports'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sakuma Exports 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. Over the last three years, Sakuma Exports actually produced more free cash flow than EBIT. 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 Sakuma Exports has ₹1.76b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in -₹182m. So is Sakuma Exports'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. To that end, you should learn about the 4 warning signs we've spotted with Sakuma Exports (including 1 which doesn't sit too well with us) .

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.