Here's Why SundrugLtd (TSE:9989) Can Manage Its Debt Responsibly

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.' 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. We can see that Sundrug Co.,Ltd. (TSE:9989) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is SundrugLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2025 SundrugLtd had debt of JP¥43.6b, up from JP¥34.4b in one year. However, its balance sheet shows it holds JP¥66.1b in cash, so it actually has JP¥22.5b net cash.

How Healthy Is SundrugLtd's Balance Sheet?

We can see from the most recent balance sheet that SundrugLtd had liabilities of JP¥123.9b falling due within a year, and liabilities of JP¥49.3b due beyond that. Offsetting these obligations, it had cash of JP¥66.1b as well as receivables valued at JP¥27.2b due within 12 months. So its liabilities total JP¥79.8b more than the combination of its cash and short-term receivables.

Of course, SundrugLtd has a market capitalization of JP¥502.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SundrugLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for SundrugLtd

And we also note warmly that SundrugLtd 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 ultimately the future profitability of the business will decide if SundrugLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SundrugLtd 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, SundrugLtd created free cash flow amounting to 12% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although SundrugLtd'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¥22.5b. On top of that, it increased its EBIT by 11% in the last twelve months. So we are not troubled with SundrugLtd'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. To that end, you should be aware of the 1 warning sign we've spotted with SundrugLtd .

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.