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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sega Sammy Holdings Inc. (TSE:6460) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

See our latest analysis for Sega Sammy Holdings

What Is Sega Sammy Holdings's Net Debt?

As you can see below, at the end of June 2024, Sega Sammy Holdings had JP¥157.0b of debt, up from JP¥52.0b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥221.0b in cash, so it actually has JP¥64.0b net cash.

A Look At Sega Sammy Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Sega Sammy Holdings had liabilities of JP¥115.0b due within 12 months and liabilities of JP¥159.2b due beyond that. Offsetting these obligations, it had cash of JP¥221.0b as well as receivables valued at JP¥44.8b due within 12 months. So it has liabilities totalling JP¥8.48b more than its cash and near-term receivables, combined.

Having regard to Sega Sammy Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥640.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Sega Sammy Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Sega Sammy Holdings's EBIT dived 20%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sega Sammy Holdings 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, Sega Sammy Holdings generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sega Sammy Holdings has JP¥64.0b in net cash. And it impressed us with free cash flow of JP¥55b, being 86% of its EBIT. So we don't have any problem with Sega Sammy Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sega Sammy Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.