Health Check: How Prudently Does Shinwa Wise HoldingsLtd (TYO:2437) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Shinwa Wise Holdings Co.,Ltd. (TYO:2437) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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¥480.0m at the end of November 2020, a reduction from JP¥872.0m over a year. However, it does have JP¥535.0m in cash offsetting this, leading to net cash of JP¥55.0m.

How Healthy Is Shinwa Wise HoldingsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shinwa Wise HoldingsLtd had liabilities of JP¥830.0m due within 12 months and liabilities of JP¥418.0m due beyond that. On the other hand, it had cash of JP¥535.0m and JP¥447.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥266.0m.

Given Shinwa Wise HoldingsLtd has a market capitalization of JP¥3.55b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shinwa Wise HoldingsLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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¥1.9b, which is a fall of 10%. That's not what we would hope to see.

So How Risky Is Shinwa Wise HoldingsLtd?

While Shinwa Wise HoldingsLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow JP¥752m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 3 warning signs for Shinwa Wise HoldingsLtd you should be aware of, and 1 of them is a bit unpleasant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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