These 4 Measures Indicate That Sun A.Kaken CompanyLimited (TYO:4234) 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.' 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 Sun A.Kaken Company,Limited (TYO:4234) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sun A.Kaken CompanyLimited

What Is Sun A.Kaken CompanyLimited's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Sun A.Kaken CompanyLimited had debt of JP¥4.88b, up from JP¥3.66b in one year. But on the other hand it also has JP¥7.01b in cash, leading to a JP¥2.13b net cash position.

A Look At Sun A.Kaken CompanyLimited's Liabilities

According to the last reported balance sheet, Sun A.Kaken CompanyLimited had liabilities of JP¥13.1b due within 12 months, and liabilities of JP¥3.53b due beyond 12 months. Offsetting these obligations, it had cash of JP¥7.01b as well as receivables valued at JP¥11.4b due within 12 months. So it can boast JP¥1.83b more liquid assets than total liabilities.

This surplus liquidity suggests that Sun A.Kaken CompanyLimited's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Sun A.Kaken CompanyLimited has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Sun A.Kaken CompanyLimited grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sun A.Kaken CompanyLimited's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. Sun A.Kaken CompanyLimited 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 three years, Sun A.Kaken CompanyLimited actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sun A.Kaken CompanyLimited has net cash of JP¥2.13b, as well as more liquid assets than liabilities. The cherry on top was that in converted 270% of that EBIT to free cash flow, bringing in JP¥709m. When it comes to Sun A.Kaken CompanyLimited's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Sun A.Kaken CompanyLimited (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

When trading Sun A.Kaken CompanyLimited or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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