Is Sega Sammy Holdings (TSE:6460) A Risky Investment?

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.' 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, Sega Sammy Holdings Inc. (TSE:6460) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sega Sammy Holdings

What Is Sega Sammy Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sega Sammy Holdings had JP¥157.0b of debt, an increase on JP¥52.0b, over one year. But it also has JP¥219.8b in cash to offset that, meaning it has JP¥62.8b net cash.

A Look At Sega Sammy Holdings' Liabilities

According to the last reported balance sheet, Sega Sammy Holdings had liabilities of JP¥135.5b due within 12 months, and liabilities of JP¥160.8b due beyond 12 months. Offsetting these obligations, it had cash of JP¥219.8b as well as receivables valued at JP¥74.3b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Sega Sammy Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥494.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Sega Sammy Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Sega Sammy Holdings has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sega Sammy Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sega Sammy Holdings 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. Over the last three years, Sega Sammy Holdings recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Sega Sammy Holdings's liabilities, but we can be reassured by the fact it has has net cash of JP¥62.8b. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in JP¥55b. So we don't think Sega Sammy Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Sega Sammy Holdings that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com