We Think Sugi HoldingsLtd (TSE:7649) Can Stay On Top Of Its 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 note that Sugi Holdings Co.,Ltd. (TSE:7649) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 November 2024 Sugi HoldingsLtd had JP¥47.2b of debt, an increase on none, over one year. But on the other hand it also has JP¥74.0b in cash, leading to a JP¥26.8b net cash position.

A Look At Sugi HoldingsLtd's Liabilities

The latest balance sheet data shows that Sugi HoldingsLtd had liabilities of JP¥261.7b due within a year, and liabilities of JP¥29.8b falling due after that. Offsetting these obligations, it had cash of JP¥74.0b as well as receivables valued at JP¥91.9b due within 12 months. So it has liabilities totalling JP¥125.6b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sugi HoldingsLtd is worth JP¥461.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Sugi HoldingsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sugi HoldingsLtd grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Sugi HoldingsLtd recorded free cash flow worth 59% 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

While Sugi HoldingsLtd does have more liabilities than liquid assets, it also has net cash of JP¥26.8b. 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.

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.