These 4 Measures Indicate That STI Foods HoldingsInc (TSE:2932) Is Using Debt Safely

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 STI Foods Holdings,Inc. (TSE:2932) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 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 STI Foods HoldingsInc

What Is STI Foods HoldingsInc's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 STI Foods HoldingsInc had JP¥2.07b of debt, an increase on JP¥557.0m, over one year. However, it does have JP¥2.81b in cash offsetting this, leading to net cash of JP¥734.0m.

How Healthy Is STI Foods HoldingsInc's Balance Sheet?

We can see from the most recent balance sheet that STI Foods HoldingsInc had liabilities of JP¥6.51b falling due within a year, and liabilities of JP¥2.19b due beyond that. Offsetting these obligations, it had cash of JP¥2.81b as well as receivables valued at JP¥3.77b due within 12 months. So its liabilities total JP¥2.13b more than the combination of its cash and short-term receivables.

Given STI Foods HoldingsInc has a market capitalization of JP¥22.1b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, STI Foods HoldingsInc boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that STI Foods HoldingsInc has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since STI Foods HoldingsInc will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While STI Foods HoldingsInc 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. During the last three years, STI Foods HoldingsInc produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about STI Foods HoldingsInc's liabilities, but we can be reassured by the fact it has has net cash of JP¥734.0m. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think STI Foods HoldingsInc's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for STI Foods HoldingsInc that you should be aware of.

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.