Warren Buffett famously said, '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 The Sailor Pen Co., Ltd. (TSE:7992) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Sailor Pen
How Much Debt Does Sailor Pen Carry?
As you can see below, at the end of March 2024, Sailor Pen had JP¥1.45b of debt, up from JP¥1.15b a year ago. Click the image for more detail. However, because it has a cash reserve of JP¥653.0m, its net debt is less, at about JP¥796.0m.
How Strong Is Sailor Pen's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sailor Pen had liabilities of JP¥2.01b due within 12 months and liabilities of JP¥1.15b due beyond that. Offsetting this, it had JP¥653.0m in cash and JP¥849.0m in receivables that were due within 12 months. So its liabilities total JP¥1.66b more than the combination of its cash and short-term receivables.
Sailor Pen has a market capitalization of JP¥2.88b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Sailor Pen's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Sailor Pen had a loss before interest and tax, and actually shrunk its revenue by 7.6%, to JP¥4.5b. We would much prefer see growth.
Caveat Emptor
Importantly, Sailor Pen had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥398m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥865m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 4 warning signs for Sailor Pen (2 don't sit too well with us) you should be aware of.
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.
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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.
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About TSE:7992
Low with imperfect balance sheet.
