These 4 Measures Indicate That Sanwa Holdings (TSE:5929) Is Using Debt Safely

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.' 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. We note that Sanwa Holdings Corporation (TSE:5929) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sanwa Holdings

How Much Debt Does Sanwa Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Sanwa Holdings had JP¥44.9b of debt in June 2024, down from JP¥54.8b, one year before. However, its balance sheet shows it holds JP¥104.3b in cash, so it actually has JP¥59.4b net cash.

A Look At Sanwa Holdings' Liabilities

According to the last reported balance sheet, Sanwa Holdings had liabilities of JP¥136.1b due within 12 months, and liabilities of JP¥65.6b due beyond 12 months. Offsetting these obligations, it had cash of JP¥104.3b as well as receivables valued at JP¥112.6b due within 12 months. So it actually has JP¥15.2b 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. Succinctly put, Sanwa Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sanwa Holdings grew its EBIT at 11% over the last year, further increasing its ability to manage 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 Sanwa Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sanwa Holdings has net cash of JP¥59.4b, 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.

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.