Does Sanki Engineering (TSE:1961) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Sanki Engineering Co., Ltd. (TSE:1961) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Sanki Engineering's Net Debt?

As you can see below, at the end of December 2024, Sanki Engineering had JP¥7.17b of debt, up from JP¥6.02b a year ago. Click the image for more detail. But it also has JP¥32.3b in cash to offset that, meaning it has JP¥25.1b net cash.

How Strong Is Sanki Engineering's Balance Sheet?

The latest balance sheet data shows that Sanki Engineering had liabilities of JP¥77.7b due within a year, and liabilities of JP¥14.6b falling due after that. On the other hand, it had cash of JP¥32.3b and JP¥79.6b worth of receivables due within a year. So it can boast JP¥19.5b more liquid assets than total liabilities.

This surplus suggests that Sanki Engineering has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sanki Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Sanki Engineering

On top of that, Sanki Engineering grew its EBIT by 91% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sanki Engineering can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sanki Engineering 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. Looking at the most recent three years, Sanki Engineering recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sanki Engineering has net cash of JP¥25.1b, as well as more liquid assets than liabilities. And we liked the look of last year's 91% year-on-year EBIT growth. So is Sanki Engineering's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Sanki Engineering 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.