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 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 can see that Sata Construction Co., Ltd. (TSE:1826) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Sata Construction
How Much Debt Does Sata Construction Carry?
The chart below, which you can click on for greater detail, shows that Sata Construction had JPÂ¥1.29b in debt in March 2024; about the same as the year before. But on the other hand it also has JPÂ¥13.9b in cash, leading to a JPÂ¥12.6b net cash position.
How Strong Is Sata Construction's Balance Sheet?
According to the last reported balance sheet, Sata Construction had liabilities of JPÂ¥10.0b due within 12 months, and liabilities of JPÂ¥1.01b due beyond 12 months. Offsetting these obligations, it had cash of JPÂ¥13.9b as well as receivables valued at JPÂ¥7.16b due within 12 months. So it actually has JPÂ¥10.0b more liquid assets than total liabilities.
This surplus strongly suggests that Sata Construction has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Sata Construction has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Sata Construction if management cannot prevent a repeat of the 89% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sata Construction'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, a company can only pay off debt with cold hard cash, not accounting profits. Sata Construction 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, Sata Construction 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 we empathize with investors who find debt concerning, you should keep in mind that Sata Construction has net cash of JPÂ¥12.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 202% of that EBIT to free cash flow, bringing in JPÂ¥2.0b. So is Sata Construction's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Sata Construction (of which 1 shouldn't be ignored!) 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. 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.
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About TSE:1826
Sata Construction
Engages in the contracting and investigation, planning and designing, and supervision of civil engineering and other construction works in Japan.
Flawless balance sheet slight.
