Is Soda Nikka (TSE:8158) Using Too Much Debt?

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.' 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. As with many other companies Soda Nikka Co., Ltd. (TSE:8158) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Soda Nikka

How Much Debt Does Soda Nikka Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Soda Nikka had JP¥6.17b of debt, an increase on JP¥4.76b, over one year. But it also has JP¥9.70b in cash to offset that, meaning it has JP¥3.53b net cash.

How Strong Is Soda Nikka's Balance Sheet?

According to the last reported balance sheet, Soda Nikka had liabilities of JP¥45.3b due within 12 months, and liabilities of JP¥4.72b due beyond 12 months. Offsetting this, it had JP¥9.70b in cash and JP¥46.3b in receivables that were due within 12 months. So it can boast JP¥5.96b more liquid assets than total liabilities.

It's good to see that Soda Nikka has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Soda Nikka boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Soda Nikka has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Soda Nikka will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Soda Nikka 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 last three years, Soda Nikka reported free cash flow worth 12% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Soda Nikka has JP¥3.53b in net cash and a decent-looking balance sheet. And we liked the look of last year's 27% year-on-year EBIT growth. So is Soda Nikka's debt a risk? It doesn't seem so to us. Given Soda Nikka has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.

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