These 4 Measures Indicate That Sekisui Jushi (TSE:4212) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Sekisui Jushi Corporation (TSE:4212) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sekisui Jushi

What Is Sekisui Jushi's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sekisui Jushi had JP¥10.1b of debt, an increase on JP¥900.0m, over one year. But it also has JP¥15.2b in cash to offset that, meaning it has JP¥5.07b net cash.

How Strong Is Sekisui Jushi's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sekisui Jushi had liabilities of JP¥30.1b due within 12 months and liabilities of JP¥4.38b due beyond that. Offsetting these obligations, it had cash of JP¥15.2b as well as receivables valued at JP¥25.8b due within 12 months. So it can boast JP¥6.53b more liquid assets than total liabilities.

This short term liquidity is a sign that Sekisui Jushi could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sekisui Jushi boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Sekisui Jushi's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sekisui Jushi will need earnings to service that debt. 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. Sekisui Jushi 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. Looking at the most recent three years, Sekisui Jushi recorded free cash flow of 41% 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 Sekisui Jushi has net cash of JP¥5.07b, as well as more liquid assets than liabilities. So we are not troubled with Sekisui Jushi's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for Sekisui Jushi (of which 1 is concerning!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com