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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Sugi Holdings Co.,Ltd. (TSE:7649) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, 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.

See our latest analysis for Sugi HoldingsLtd

What Is Sugi HoldingsLtd's Debt?

The image below, which you can click on for greater detail, shows that at May 2024 Sugi HoldingsLtd had debt of JP¥11.3b, up from none in one year. However, it does have JP¥48.7b in cash offsetting this, leading to net cash of JP¥37.5b.

How Strong Is Sugi HoldingsLtd's Balance Sheet?

The latest balance sheet data shows that Sugi HoldingsLtd had liabilities of JP¥150.9b due within a year, and liabilities of JP¥20.9b falling due after that. Offsetting these obligations, it had cash of JP¥48.7b as well as receivables valued at JP¥48.8b due within 12 months. So it has liabilities totalling JP¥74.2b more than its cash and near-term receivables, combined.

Given Sugi HoldingsLtd has a market capitalization of JP¥465.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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. Looking at the most recent three years, Sugi HoldingsLtd recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Sugi HoldingsLtd does have more liabilities than liquid assets, it also has net cash of JP¥37.5b. And it also grew its EBIT by 14% 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.

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.

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