SAKURASAKU PLUSCo.Ltd (TSE:7097) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, SAKURASAKU PLUS,Co.,Ltd. (TSE:7097) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SAKURASAKU PLUSCo.Ltd

What Is SAKURASAKU PLUSCo.Ltd's Debt?

As you can see below, SAKURASAKU PLUSCo.Ltd had JP¥5.44b of debt at October 2024, down from JP¥6.37b a year prior. On the flip side, it has JP¥999.0m in cash leading to net debt of about JP¥4.44b.

How Healthy Is SAKURASAKU PLUSCo.Ltd's Balance Sheet?

According to the last reported balance sheet, SAKURASAKU PLUSCo.Ltd had liabilities of JP¥3.73b due within 12 months, and liabilities of JP¥5.43b due beyond 12 months. Offsetting these obligations, it had cash of JP¥999.0m as well as receivables valued at JP¥1.78b due within 12 months. So it has liabilities totalling JP¥6.38b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥10.1b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

SAKURASAKU PLUSCo.Ltd's net debt is 3.2 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 15.1 is very high, suggesting that the interest expense on the debt is currently quite low. It is well worth noting that SAKURASAKU PLUSCo.Ltd's EBIT shot up like bamboo after rain, gaining 88% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is SAKURASAKU PLUSCo.Ltd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last two years, SAKURASAKU PLUSCo.Ltd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

The good news is that SAKURASAKU PLUSCo.Ltd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its net debt to EBITDA. When we consider the range of factors above, it looks like SAKURASAKU PLUSCo.Ltd is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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 SAKURASAKU PLUSCo.Ltd has 5 warning signs (and 2 which can't be ignored) we think you should know about.

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.