Does Sanwa Holdings (TSE:5929) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Sanwa Holdings Corporation (TSE:5929) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sanwa Holdings

What Is Sanwa Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Sanwa Holdings had JP¥43.6b of debt in September 2024, down from JP¥48.3b, one year before. However, its balance sheet shows it holds JP¥121.1b in cash, so it actually has JP¥77.6b net cash.

A Look At Sanwa Holdings' Liabilities

The latest balance sheet data shows that Sanwa Holdings had liabilities of JP¥142.1b due within a year, and liabilities of JP¥64.5b falling due after that. Offsetting this, it had JP¥121.1b in cash and JP¥126.0b in receivables that were due within 12 months. So it can boast JP¥40.5b more liquid assets than total liabilities.

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

And we also note warmly that Sanwa Holdings grew its EBIT by 12% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sanwa Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sanwa Holdings 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 most recent three years, Sanwa Holdings recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sanwa Holdings has net cash of JP¥77.6b, as well as more liquid assets than liabilities. So is Sanwa Holdings's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Sanwa Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.