Is Daiichi Sankyo Company (TSE:4568) 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.' 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, Daiichi Sankyo Company, Limited (TSE:4568) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Daiichi Sankyo Company's Net Debt?

The chart below, which you can click on for greater detail, shows that Daiichi Sankyo Company had JP¥101.4b in debt in December 2024; about the same as the year before. But on the other hand it also has JP¥682.1b in cash, leading to a JP¥580.7b net cash position.

How Strong Is Daiichi Sankyo Company's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Daiichi Sankyo Company had liabilities of JP¥712.4b due within 12 months and liabilities of JP¥1.11t due beyond that. Offsetting this, it had JP¥682.1b in cash and JP¥624.2b in receivables that were due within 12 months. So it has liabilities totalling JP¥512.9b more than its cash and near-term receivables, combined.

Of course, Daiichi Sankyo Company has a titanic market capitalization of JP¥6.80t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Daiichi Sankyo Company boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Daiichi Sankyo Company

On top of that, Daiichi Sankyo Company grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. 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 Daiichi Sankyo Company'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. Daiichi Sankyo Company 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. Over the most recent three years, Daiichi Sankyo Company recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Daiichi Sankyo Company's liabilities, but we can be reassured by the fact it has has net cash of JP¥580.7b. And it impressed us with its EBIT growth of 57% over the last year. So we don't think Daiichi Sankyo Company's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Daiichi Sankyo Company you should be aware of, and 1 of them can't be ignored.

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.