These 4 Measures Indicate That Sumitomo Bakelite (TSE:4203) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Sumitomo Bakelite Company Limited (TSE:4203) does carry debt. But is this debt a concern to shareholders?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Sumitomo Bakelite Carry?

As you can see below, at the end of June 2025, Sumitomo Bakelite had JP¥35.9b of debt, up from JP¥31.6b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥104.9b in cash, so it actually has JP¥68.9b net cash.

How Strong Is Sumitomo Bakelite's Balance Sheet?

The latest balance sheet data shows that Sumitomo Bakelite had liabilities of JP¥85.6b due within a year, and liabilities of JP¥42.9b falling due after that. On the other hand, it had cash of JP¥104.9b and JP¥62.1b worth of receivables due within a year. So it can boast JP¥38.5b more liquid assets than total liabilities.

This short term liquidity is a sign that Sumitomo Bakelite could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sumitomo Bakelite boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Sumitomo Bakelite

The good news is that Sumitomo Bakelite has increased its EBIT by 7.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sumitomo Bakelite 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sumitomo Bakelite 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, Sumitomo Bakelite produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sumitomo Bakelite has net cash of JP¥68.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in JP¥25b. So we don't think Sumitomo Bakelite's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Sumitomo Bakelite you should be aware of.

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.