Sankyo Seiko (TSE:8018) 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.' 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. As with many other companies Sankyo Seiko Co., Ltd. (TSE:8018) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sankyo Seiko

How Much Debt Does Sankyo Seiko Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sankyo Seiko had JP¥5.22b of debt, an increase on JP¥3.09b, over one year. However, its balance sheet shows it holds JP¥11.9b in cash, so it actually has JP¥6.69b net cash.

How Strong Is Sankyo Seiko's Balance Sheet?

According to the last reported balance sheet, Sankyo Seiko had liabilities of JP¥8.15b due within 12 months, and liabilities of JP¥10.7b due beyond 12 months. Offsetting these obligations, it had cash of JP¥11.9b as well as receivables valued at JP¥3.57b due within 12 months. So its liabilities total JP¥3.41b more than the combination of its cash and short-term receivables.

Given Sankyo Seiko has a market capitalization of JP¥23.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Sankyo Seiko boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Sankyo Seiko grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sankyo Seiko will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sankyo Seiko 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. In the last three years, Sankyo Seiko's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Sankyo Seiko does have more liabilities than liquid assets, it also has net cash of JP¥6.69b. On top of that, it increased its EBIT by 11% in the last twelve months. So we are not troubled with Sankyo Seiko's debt use. 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 example - Sankyo Seiko has 1 warning sign we think you should be aware of.

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.

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