Is Senshu ElectricLtd (TSE:9824) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Senshu Electric Co.,Ltd. (TSE:9824) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Senshu ElectricLtd

What Is Senshu ElectricLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Senshu ElectricLtd had JP¥856.0m of debt in October 2023, down from JP¥932.0m, one year before. However, it does have JP¥28.5b in cash offsetting this, leading to net cash of JP¥27.7b.

A Look At Senshu ElectricLtd's Liabilities

According to the last reported balance sheet, Senshu ElectricLtd had liabilities of JP¥47.7b due within 12 months, and liabilities of JP¥2.94b due beyond 12 months. On the other hand, it had cash of JP¥28.5b and JP¥34.6b worth of receivables due within a year. So it actually has JP¥12.5b more liquid assets than total liabilities.

It's good to see that Senshu ElectricLtd 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, Senshu ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Senshu ElectricLtd grew its EBIT by 12% last year, making its debt load easier 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 Senshu ElectricLtd'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. Senshu ElectricLtd 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. During the last three years, Senshu ElectricLtd generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Senshu ElectricLtd has JP¥27.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥3.9b, being 92% of its EBIT. So we don't think Senshu ElectricLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Senshu ElectricLtd is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.