Does Sanko SangyoLtd (TYO:7922) Have A Healthy Balance Sheet?

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.' 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 Sanko Sangyo Co.,Ltd. (TYO:7922) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Sanko SangyoLtd

How Much Debt Does Sanko SangyoLtd Carry?

As you can see below, at the end of December 2020, Sanko SangyoLtd had JP¥938.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥2.18b in cash, so it actually has JP¥1.24b net cash.

A Look At Sanko SangyoLtd's Liabilities

We can see from the most recent balance sheet that Sanko SangyoLtd had liabilities of JP¥3.41b falling due within a year, and liabilities of JP¥552.0m due beyond that. Offsetting this, it had JP¥2.18b in cash and JP¥3.98b in receivables that were due within 12 months. So it can boast JP¥2.19b more liquid assets than total liabilities.

This surplus liquidity suggests that Sanko SangyoLtd'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, Sanko SangyoLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Sanko SangyoLtd made a loss at the EBIT level, last year, it was also good to see that it generated JP¥17m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Sanko SangyoLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sanko SangyoLtd 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 last year, Sanko SangyoLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sanko SangyoLtd has net cash of JP¥1.24b, as well as more liquid assets than liabilities. So we don't have any problem with Sanko SangyoLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sanko SangyoLtd is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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