Is Seibu GikenLtd (TSE:6223) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Seibu Giken Co.,Ltd. (TSE:6223) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Seibu GikenLtd Carry?

As you can see below, Seibu GikenLtd had JP¥1.34b of debt at December 2024, down from JP¥2.09b a year prior. But on the other hand it also has JP¥14.4b in cash, leading to a JP¥13.1b net cash position.

How Healthy Is Seibu GikenLtd's Balance Sheet?

The latest balance sheet data shows that Seibu GikenLtd had liabilities of JP¥11.7b due within a year, and liabilities of JP¥1.17b falling due after that. Offsetting these obligations, it had cash of JP¥14.4b as well as receivables valued at JP¥8.16b due within 12 months. So it can boast JP¥9.77b more liquid assets than total liabilities.

This surplus liquidity suggests that Seibu GikenLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Seibu GikenLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Seibu GikenLtd

On the other hand, Seibu GikenLtd saw its EBIT drop by 6.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Seibu GikenLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Seibu GikenLtd 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, Seibu GikenLtd recorded free cash flow of 34% 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 Seibu GikenLtd has net cash of JP¥13.1b, as well as more liquid assets than liabilities. So we don't have any problem with Seibu GikenLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Seibu GikenLtd that you should be aware of before investing here.

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.