Does Sugi HoldingsLtd (TSE:7649) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Sugi Holdings Co.,Ltd. (TSE:7649) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sugi HoldingsLtd

What Is Sugi HoldingsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of February 2024 Sugi HoldingsLtd had JP¥837.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds JP¥47.4b in cash, so it actually has JP¥46.6b net cash.

A Look At Sugi HoldingsLtd's Liabilities

According to the last reported balance sheet, Sugi HoldingsLtd had liabilities of JP¥136.6b due within 12 months, and liabilities of JP¥20.6b due beyond 12 months. On the other hand, it had cash of JP¥47.4b and JP¥44.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥65.4b.

Since publicly traded Sugi HoldingsLtd shares are worth a total of JP¥420.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sugi HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Sugi HoldingsLtd grew its EBIT by 16% 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 ultimately the future profitability of the business will decide if Sugi HoldingsLtd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Sugi HoldingsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Sugi HoldingsLtd created free cash flow amounting to 6.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Sugi HoldingsLtd does have more liabilities than liquid assets, it also has net cash of JP¥46.6b. And it impressed us with its EBIT growth of 16% over the last year. So we don't have any problem with Sugi HoldingsLtd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sugi HoldingsLtd's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.