Is SaizeriyaLtd (TSE:7581) Using Too Much Debt?

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.' 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. Importantly, Saizeriya Co.,Ltd. (TSE:7581) 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SaizeriyaLtd

What Is SaizeriyaLtd's Net Debt?

As you can see below, SaizeriyaLtd had JP¥12.5b of debt, at February 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥71.1b in cash to offset that, meaning it has JP¥58.6b net cash.

How Healthy Is SaizeriyaLtd's Balance Sheet?

The latest balance sheet data shows that SaizeriyaLtd had liabilities of JP¥39.9b due within a year, and liabilities of JP¥16.9b falling due after that. On the other hand, it had cash of JP¥71.1b and JP¥3.46b worth of receivables due within a year. So it can boast JP¥17.8b 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. Simply put, the fact that SaizeriyaLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, SaizeriyaLtd grew its EBIT by 790% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SaizeriyaLtd 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. Happily for any shareholders, SaizeriyaLtd actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SaizeriyaLtd has net cash of JP¥58.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥20b, being 202% of its EBIT. So is SaizeriyaLtd's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for SaizeriyaLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com