Is SundrugLtd (TSE:9989) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Sundrug Co.,Ltd. (TSE:9989) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is SundrugLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 SundrugLtd had JP¥44.2b of debt, an increase on JP¥35.0b, over one year. However, it does have JP¥63.0b in cash offsetting this, leading to net cash of JP¥18.8b.

How Strong Is SundrugLtd's Balance Sheet?

The latest balance sheet data shows that SundrugLtd had liabilities of JP¥121.9b due within a year, and liabilities of JP¥50.3b falling due after that. On the other hand, it had cash of JP¥63.0b and JP¥28.6b worth of receivables due within a year. So its liabilities total JP¥80.6b more than the combination of its cash and short-term receivables.

Since publicly traded SundrugLtd shares are worth a total of JP¥541.4b, it seems unlikely that this level of liabilities would be a major 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, SundrugLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for SundrugLtd

Fortunately, SundrugLtd grew its EBIT by 9.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SundrugLtd 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. SundrugLtd 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, SundrugLtd created free cash flow amounting to 13% 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 SundrugLtd does have more liabilities than liquid assets, it also has net cash of JP¥18.8b. And it also grew its EBIT by 9.1% over the last year. So we don't have any problem with SundrugLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that SundrugLtd is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.