Does Sharp (TSE:6753) Have A 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.' 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. Importantly, Sharp Corporation (TSE:6753) does carry debt. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sharp

How Much Debt Does Sharp Carry?

You can click the graphic below for the historical numbers, but it shows that Sharp had JP¥617.6b of debt in December 2023, down from JP¥719.4b, one year before. However, because it has a cash reserve of JP¥211.9b, its net debt is less, at about JP¥405.7b.

How Strong Is Sharp's Balance Sheet?

We can see from the most recent balance sheet that Sharp had liabilities of JP¥908.7b falling due within a year, and liabilities of JP¥571.1b due beyond that. On the other hand, it had cash of JP¥211.9b and JP¥431.5b worth of receivables due within a year. So it has liabilities totalling JP¥836.3b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the JP¥530.2b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Sharp would likely require a major re-capitalisation if it had to pay its creditors today. 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 Sharp'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.

Over 12 months, Sharp made a loss at the EBIT level, and saw its revenue drop to JP¥2.3t, which is a fall of 8.7%. We would much prefer see growth.

Caveat Emptor

Importantly, Sharp had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥30b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of JP¥252b. In the meantime, we consider the stock to be risky. For riskier companies like Sharp I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.