Would Shimizu (TSE:1803) Be Better Off With Less Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shimizu Corporation (TSE:1803) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Shimizu

What Is Shimizu's Net Debt?

As you can see below, Shimizu had JP¥595.4b of debt at December 2023, down from JP¥670.0b a year prior. However, because it has a cash reserve of JP¥282.5b, its net debt is less, at about JP¥312.9b.

How Healthy Is Shimizu's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shimizu had liabilities of JP¥1.14t due within 12 months and liabilities of JP¥450.7b due beyond that. On the other hand, it had cash of JP¥282.5b and JP¥863.1b worth of receivables due within a year. So its liabilities total JP¥447.6b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of JP¥631.0b, so it does suggest shareholders should keep an eye on Shimizu's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shimizu's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shimizu wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to JP¥2.1t. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Shimizu produced an earnings before interest and tax (EBIT) loss. Indeed, it lost JP¥25b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled JP¥20b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Shimizu (of which 1 is a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.