Is Sharp (TSE:6753) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sharp Corporation (TSE:6753) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Sharp

What Is Sharp's Net Debt?

As you can see below, Sharp had JP¥573.6b of debt at March 2024, down from JP¥706.6b a year prior. On the flip side, it has JP¥227.1b in cash leading to net debt of about JP¥346.5b.

How Strong Is Sharp's Balance Sheet?

The latest balance sheet data shows that Sharp had liabilities of JP¥856.4b due within a year, and liabilities of JP¥576.3b falling due after that. On the other hand, it had cash of JP¥227.1b and JP¥402.5b worth of receivables due within a year. So it has liabilities totalling JP¥803.0b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of JP¥639.2b, we think shareholders really should watch Sharp's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sharp 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.

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 8.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, Sharp had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost JP¥24b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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¥150b. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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