These 4 Measures Indicate That Sugi HoldingsLtd (TSE:7649) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Sugi Holdings Co.,Ltd. (TSE:7649) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sugi HoldingsLtd

How Much Debt Does Sugi HoldingsLtd Carry?

The image below, which you can click on for greater detail, shows that at August 2024 Sugi HoldingsLtd had debt of JP¥11.2b, up from none in one year. But on the other hand it also has JP¥78.2b in cash, leading to a JP¥67.0b net cash position.

A Look At Sugi HoldingsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Sugi HoldingsLtd had liabilities of JP¥181.6b due within 12 months and liabilities of JP¥21.1b due beyond that. Offsetting this, it had JP¥78.2b in cash and JP¥64.1b in receivables that were due within 12 months. So its liabilities total JP¥60.5b more than the combination of its cash and short-term receivables.

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 18% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sugi HoldingsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sugi HoldingsLtd 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. Over the most recent three years, Sugi HoldingsLtd recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Sugi HoldingsLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥67.0b. And we liked the look of last year's 18% year-on-year EBIT growth. So is Sugi HoldingsLtd's debt a risk? It doesn't seem so to us. 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.