Sega Sammy Holdings (TSE:6460) Has A Pretty 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. Importantly, Sega Sammy Holdings Inc. (TSE:6460) does carry debt. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sega Sammy Holdings

What Is Sega Sammy Holdings's Net Debt?

As you can see below, Sega Sammy Holdings had JP¥153.3b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥208.8b in cash to offset that, meaning it has JP¥55.6b net cash.

How Healthy Is Sega Sammy Holdings' Balance Sheet?

We can see from the most recent balance sheet that Sega Sammy Holdings had liabilities of JP¥109.1b falling due within a year, and liabilities of JP¥156.8b due beyond that. Offsetting this, it had JP¥208.8b in cash and JP¥45.4b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥11.7b.

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¥604.7b 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.

It is just as well that Sega Sammy Holdings's load is not too heavy, because its EBIT was down 35% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sega Sammy Holdings's ability to maintain a healthy balance sheet going forward. 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. 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 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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¥55.6b in net cash. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in JP¥38b. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sega Sammy Holdings is showing 2 warning signs 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.