We Think Sanwa Holdings (TSE:5929) Can Manage Its Debt With Ease

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.' 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. Importantly, Sanwa Holdings Corporation (TSE:5929) does carry debt. But should shareholders be worried about its use of debt?

We check all companies for important risks. See what we found for Sanwa Holdings in our free report.

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sanwa Holdings's Debt?

As you can see below, Sanwa Holdings had JP¥43.3b of debt at December 2024, down from JP¥46.9b a year prior. But on the other hand it also has JP¥98.6b in cash, leading to a JP¥55.3b net cash position.

How Healthy Is Sanwa Holdings' Balance Sheet?

The latest balance sheet data shows that Sanwa Holdings had liabilities of JP¥142.6b due within a year, and liabilities of JP¥61.2b falling due after that. Offsetting these obligations, it had cash of JP¥98.6b as well as receivables valued at JP¥120.3b due within 12 months. So it can boast JP¥15.0b more liquid assets than total liabilities.

This state of affairs indicates that Sanwa Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥1.02t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Sanwa Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Sanwa Holdings

Another good sign is that Sanwa Holdings has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sanwa Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sanwa Holdings 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. Over the most recent three years, Sanwa Holdings recorded free cash flow worth 68% 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 it is always sensible to investigate a company's debt, in this case Sanwa Holdings has JP¥55.3b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 21% over the last year. So we don't think Sanwa Holdings's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sanwa Holdings's earnings per share history for free.

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.