Does Sinanen Holdings (TSE:8132) Have A Healthy 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.' 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. As with many other companies Sinanen Holdings Co., Ltd. (TSE:8132) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sinanen Holdings

What Is Sinanen Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sinanen Holdings had JP¥3.90b of debt in June 2024, down from JP¥4.51b, one year before. But on the other hand it also has JP¥6.37b in cash, leading to a JP¥2.47b net cash position.

How Strong Is Sinanen Holdings' Balance Sheet?

According to the last reported balance sheet, Sinanen Holdings had liabilities of JP¥25.7b due within 12 months, and liabilities of JP¥8.49b due beyond 12 months. Offsetting this, it had JP¥6.37b in cash and JP¥23.3b in receivables that were due within 12 months. So it has liabilities totalling JP¥4.45b more than its cash and near-term receivables, combined.

Given Sinanen Holdings has a market capitalization of JP¥69.8b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sinanen Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Sinanen Holdings grew its EBIT by 17% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sinanen Holdings will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sinanen Holdings 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. During the last three years, Sinanen Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sinanen Holdings has JP¥2.47b in net cash. And it impressed us with its EBIT growth of 17% over the last year. So we don't have any problem with Sinanen Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Sinanen Holdings that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.