SE Holdings and Incubations (TSE:9478) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SE Holdings and Incubations Co., Ltd. (TSE:9478) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SE Holdings and Incubations

What Is SE Holdings and Incubations's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 SE Holdings and Incubations had debt of JP¥2.76b, up from JP¥2.59b in one year. But it also has JP¥2.94b in cash to offset that, meaning it has JP¥181.0m net cash.

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¥3.53b due within 12 months and liabilities of JP¥1.59b due beyond that. On the other hand, it had cash of JP¥2.94b and JP¥6.97b worth of receivables due within a year. So it can boast JP¥4.80b more liquid assets than total liabilities.

This surplus liquidity suggests that SE Holdings and Incubations' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 the other hand, SE Holdings and Incubations's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is SE Holdings and Incubations's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case SE Holdings and Incubations has JP¥181.0m in net cash and a decent-looking balance sheet. So we don't think SE Holdings and Incubations's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with SE Holdings and Incubations .

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.