Does Souken Ace (TSE:1757) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Souken Ace Co., Ltd. (TSE:1757) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

View our latest analysis for Souken Ace

How Much Debt Does Souken Ace Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Souken Ace had debt of JP¥1.33b, up from JP¥643.0m in one year. However, it also had JP¥30.0m in cash, and so its net debt is JP¥1.30b.

How Healthy Is Souken Ace's Balance Sheet?

We can see from the most recent balance sheet that Souken Ace had liabilities of JP¥1.81b falling due within a year, and liabilities of JP¥659.0m due beyond that. On the other hand, it had cash of JP¥30.0m and JP¥634.0m worth of receivables due within a year. So it has liabilities totalling JP¥1.80b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Souken Ace is worth JP¥5.36b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Souken Ace'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 Souken Ace had a loss before interest and tax, and actually shrunk its revenue by 43%, to JP¥1.7b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Souken Ace's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable JP¥1.1b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥1.0b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Souken Ace (1 shouldn't be ignored) 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.