Does Sohgo Security ServicesLtd (TSE:2331) Have A Healthy Balance Sheet?

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.' 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. We note that Sohgo Security Services Co.,Ltd. (TSE:2331) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sohgo Security ServicesLtd

What Is Sohgo Security ServicesLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sohgo Security ServicesLtd had JP¥28.1b of debt in December 2023, down from JP¥38.3b, one year before. But on the other hand it also has JP¥154.2b in cash, leading to a JP¥126.1b net cash position.

How Healthy Is Sohgo Security ServicesLtd's Balance Sheet?

According to the last reported balance sheet, Sohgo Security ServicesLtd had liabilities of JP¥111.7b due within 12 months, and liabilities of JP¥73.0b due beyond 12 months. Offsetting these obligations, it had cash of JP¥154.2b as well as receivables valued at JP¥61.9b due within 12 months. So it can boast JP¥31.3b more liquid assets than total liabilities.

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

And we also note warmly that Sohgo Security ServicesLtd grew its EBIT by 20% last year, making its debt load easier to handle. 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 Sohgo Security ServicesLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sohgo Security ServicesLtd 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. During the last three years, Sohgo Security ServicesLtd produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sohgo Security ServicesLtd has net cash of JP¥126.1b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is Sohgo Security ServicesLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Sohgo Security ServicesLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.