SE Holdings and Incubations (TYO:9478) Has A Rock Solid 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 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. We can see that SE Holdings and Incubations Co., Ltd. (TYO:9478) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SE Holdings and Incubations

What Is SE Holdings and Incubations's Net Debt?

As you can see below, at the end of December 2020, SE Holdings and Incubations had JP¥2.46b of debt, up from JP¥2.31b a year ago. Click the image for more detail. However, it does have JP¥2.81b in cash offsetting this, leading to net cash of JP¥352.0m.

A Look At SE Holdings and Incubations' Liabilities

Zooming in on the latest balance sheet data, we can see that SE Holdings and Incubations had liabilities of JP¥2.76b due within 12 months and liabilities of JP¥1.45b due beyond that. Offsetting these obligations, it had cash of JP¥2.81b as well as receivables valued at JP¥3.52b due within 12 months. So it actually has JP¥2.12b more liquid assets than total liabilities.

This luscious liquidity implies that SE Holdings and Incubations' balance sheet is sturdy like a giant sequoia tree. 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 SE Holdings and Incubations has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, SE Holdings and Incubations grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SE Holdings and Incubations 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SE Holdings and Incubations 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. Looking at the most recent three years, SE Holdings and Incubations recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case SE Holdings and Incubations has JP¥352.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 43% year-on-year EBIT growth. So we don't think SE Holdings and Incubations'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. Case in point: We've spotted 2 warning signs for SE Holdings and Incubations you should be aware of, and 1 of them is potentially serious.

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.

When trading SE Holdings and Incubations 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.