Does Sumitomo Metal Mining (TSE:5713) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Metal Mining Co., Ltd. (TSE:5713) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. 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 Metal Mining Carry?

As you can see below, at the end of March 2025, Sumitomo Metal Mining had JP¥560.3b of debt, up from JP¥530.3b a year ago. Click the image for more detail. On the flip side, it has JP¥159.7b in cash leading to net debt of about JP¥400.6b.

How Strong Is Sumitomo Metal Mining's Balance Sheet?

We can see from the most recent balance sheet that Sumitomo Metal Mining had liabilities of JP¥503.6b falling due within a year, and liabilities of JP¥515.6b due beyond that. Offsetting these obligations, it had cash of JP¥159.7b as well as receivables valued at JP¥207.8b due within 12 months. So it has liabilities totalling JP¥651.7b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥957.3b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sumitomo Metal Mining can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

See our latest analysis for Sumitomo Metal Mining

Over 12 months, Sumitomo Metal Mining reported revenue of JP¥1.6t, which is a gain of 10%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Sumitomo Metal Mining had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥23b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of JP¥27b and the profit of JP¥16b. So one might argue that there's still a chance it can get things on the right track. 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 example, we've discovered 2 warning signs for Sumitomo Metal Mining (1 is a bit concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.