Is SaizeriyaLtd (TSE:7581) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Saizeriya Co.,Ltd. (TSE:7581) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for SaizeriyaLtd

What Is SaizeriyaLtd's Net Debt?

As you can see below, SaizeriyaLtd had JP¥12.5b of debt, at November 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥71.5b in cash, so it actually has JP¥59.0b net cash.

How Healthy Is SaizeriyaLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SaizeriyaLtd had liabilities of JP¥41.1b due within 12 months and liabilities of JP¥16.8b due beyond that. Offsetting this, it had JP¥71.5b in cash and JP¥3.40b in receivables that were due within 12 months. So it actually has JP¥17.0b more liquid assets than total liabilities.

This surplus suggests that SaizeriyaLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SaizeriyaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, SaizeriyaLtd grew its EBIT by 284% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SaizeriyaLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SaizeriyaLtd 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. Over the last two years, SaizeriyaLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case SaizeriyaLtd has JP¥59.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥15b, being 245% of its EBIT. So we don't think SaizeriyaLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in SaizeriyaLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.