Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sanyu Construction Co.,Ltd. (TYO:1841) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Sanyu ConstructionLtd
What Is Sanyu ConstructionLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Sanyu ConstructionLtd had JP¥525.0m of debt, an increase on JP¥471.0m, over one year. However, its balance sheet shows it holds JP¥4.10b in cash, so it actually has JP¥3.58b net cash.
How Healthy Is Sanyu ConstructionLtd's Balance Sheet?
We can see from the most recent balance sheet that Sanyu ConstructionLtd had liabilities of JP¥1.67b falling due within a year, and liabilities of JP¥1.08b due beyond that. On the other hand, it had cash of JP¥4.10b and JP¥925.0m worth of receivables due within a year. So it can boast JP¥2.28b more liquid assets than total liabilities.
This luscious liquidity implies that Sanyu ConstructionLtd's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Sanyu ConstructionLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Sanyu ConstructionLtd grew its EBIT by 130% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Sanyu ConstructionLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sanyu ConstructionLtd 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, Sanyu ConstructionLtd actually produced more free cash flow than EBIT over the last two 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 Sanyu ConstructionLtd has JP¥3.58b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -JP¥173m, being 130% of its EBIT. At the end of the day we're not concerned about Sanyu ConstructionLtd's debt. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Sanyu ConstructionLtd you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. 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.
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About TSE:1841
Flawless balance sheet with solid track record.
