Is SKY Perfect JSAT Holdings (TSE:9412) Using Too Much Debt?

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 note that SKY Perfect JSAT Holdings Inc. (TSE:9412) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is SKY Perfect JSAT Holdings's Debt?

As you can see below, SKY Perfect JSAT Holdings had JP¥56.3b of debt at December 2024, down from JP¥65.9b a year prior. But on the other hand it also has JP¥116.8b in cash, leading to a JP¥60.5b net cash position.

A Look At SKY Perfect JSAT Holdings' Liabilities

According to the last reported balance sheet, SKY Perfect JSAT Holdings had liabilities of JP¥67.8b due within 12 months, and liabilities of JP¥51.7b due beyond 12 months. On the other hand, it had cash of JP¥116.8b and JP¥96.3b worth of receivables due within a year. So it actually has JP¥93.5b more liquid assets than total liabilities.

This surplus liquidity suggests that SKY Perfect JSAT Holdings' 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. Succinctly put, SKY Perfect JSAT Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for SKY Perfect JSAT Holdings

Fortunately, SKY Perfect JSAT Holdings grew its EBIT by 4.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SKY Perfect JSAT Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SKY Perfect JSAT Holdings 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. Over the last three years, SKY Perfect JSAT Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case SKY Perfect JSAT Holdings has JP¥60.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥36b, being 134% of its EBIT. So we don't think SKY Perfect JSAT Holdings'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. Be aware that SKY Perfect JSAT Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.