SaizeriyaLtd (TSE:7581) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Saizeriya Co.,Ltd. (TSE:7581) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SaizeriyaLtd

What Is SaizeriyaLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SaizeriyaLtd had JP¥6.00b of debt in August 2024, down from JP¥12.5b, one year before. However, its balance sheet shows it holds JP¥71.9b in cash, so it actually has JP¥65.9b net cash.

A Look At SaizeriyaLtd's Liabilities

The latest balance sheet data shows that SaizeriyaLtd had liabilities of JP¥32.6b due within a year, and liabilities of JP¥24.7b falling due after that. Offsetting these obligations, it had cash of JP¥71.9b as well as receivables valued at JP¥5.42b due within 12 months. So it can boast JP¥20.0b 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. 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 106% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SaizeriyaLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Happily for any shareholders, SaizeriyaLtd actually produced more free cash flow than EBIT over the last three years. 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¥65.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥15b, being 212% 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.