Stock Analysis

Does Shinwa Wise HoldingsLtd (TYO:2437) Have A Healthy Balance Sheet?

TSE:2437
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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. Importantly, Shinwa Wise Holdings Co.,Ltd. (TYO:2437) does carry debt. But the more important question is: how much risk is that debt creating?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Shinwa Wise HoldingsLtd

What Is Shinwa Wise HoldingsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Shinwa Wise HoldingsLtd had debt of JP¥417.0m at the end of August 2020, a reduction from JP¥1.15b over a year. On the flip side, it has JP¥194.0m in cash leading to net debt of about JP¥223.0m.

debt-equity-history-analysis
JASDAQ:2437 Debt to Equity History December 14th 2020

A Look At Shinwa Wise HoldingsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Shinwa Wise HoldingsLtd had liabilities of JP¥465.0m due within 12 months and liabilities of JP¥778.0m due beyond that. On the other hand, it had cash of JP¥194.0m and JP¥12.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.04b.

Shinwa Wise HoldingsLtd has a market capitalization of JP¥2.84b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Shinwa Wise HoldingsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shinwa Wise HoldingsLtd made a loss at the EBIT level, and saw its revenue drop to JP¥1.7b, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shinwa Wise HoldingsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost JP¥192m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of JP¥277m into a profit. So to be blunt we do think it is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Shinwa Wise HoldingsLtd (including 1 which is doesn't sit too well with us) .

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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