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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Shinwa Wise Holdings Co.,Ltd. (TSE:2437) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

View our latest analysis for Shinwa Wise HoldingsLtd

How Much Debt Does Shinwa Wise HoldingsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Shinwa Wise HoldingsLtd had JP¥246.0m of debt in February 2024, down from JP¥281.0m, one year before. But it also has JP¥1.17b in cash to offset that, meaning it has JP¥923.0m net cash.

A Look At Shinwa Wise HoldingsLtd's Liabilities

The latest balance sheet data shows that Shinwa Wise HoldingsLtd had liabilities of JP¥760.0m due within a year, and liabilities of JP¥261.0m falling due after that. On the other hand, it had cash of JP¥1.17b and JP¥238.0m worth of receivables due within a year. So it actually has JP¥386.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Shinwa Wise HoldingsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shinwa Wise HoldingsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shinwa Wise HoldingsLtd's saving grace is its low debt levels, because its EBIT has tanked 71% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shinwa Wise HoldingsLtd 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. During the last three years, Shinwa Wise HoldingsLtd produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shinwa Wise HoldingsLtd has net cash of JP¥923.0m, as well as more liquid assets than liabilities. So we are not troubled with Shinwa Wise HoldingsLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Shinwa Wise HoldingsLtd has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.