Sodick (TSE:6143) Could Easily Take On More Debt

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. As with many other companies Sodick Co., Ltd. (TSE:6143) makes use of debt. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about Sodick. View them for free.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

What Is Sodick's Debt?

As you can see below, Sodick had JP¥37.2b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥47.8b in cash offsetting this, leading to net cash of JP¥10.6b.

How Strong Is Sodick's Balance Sheet?

We can see from the most recent balance sheet that Sodick had liabilities of JP¥34.4b falling due within a year, and liabilities of JP¥26.1b due beyond that. Offsetting these obligations, it had cash of JP¥47.8b as well as receivables valued at JP¥18.8b due within 12 months. So it can boast JP¥6.00b more liquid assets than total liabilities.

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

See our latest analysis for Sodick

Although Sodick made a loss at the EBIT level, last year, it was also good to see that it generated JP¥2.2b in EBIT over the last twelve months. 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 Sodick 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, a company can only pay off debt with cold hard cash, not accounting profits. Sodick 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. Happily for any shareholders, Sodick actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sodick has net cash of JP¥10.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 307% of that EBIT to free cash flow, bringing in JP¥6.8b. So is Sodick's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Sodick , and understanding them should be part of your investment process.

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.

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

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.