Does Shinoken Group (TYO:8909) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Shinoken Group Co., Ltd. (TYO:8909) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shinoken Group

What Is Shinoken Group's Net Debt?

The image below, which you can click on for greater detail, shows that Shinoken Group had debt of JP¥34.7b at the end of September 2020, a reduction from JP¥37.6b over a year. However, its balance sheet shows it holds JP¥35.0b in cash, so it actually has JP¥315.0m net cash.

A Look At Shinoken Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Shinoken Group had liabilities of JP¥26.3b due within 12 months and liabilities of JP¥20.7b due beyond that. Offsetting these obligations, it had cash of JP¥35.0b as well as receivables valued at JP¥6.42b due within 12 months. So its liabilities total JP¥5.53b more than the combination of its cash and short-term receivables.

Of course, Shinoken Group has a market capitalization of JP¥37.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Shinoken Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Shinoken Group has seen its EBIT plunge 18% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shinoken Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shinoken Group 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 last three years, Shinoken Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Shinoken Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥315.0m. And it impressed us with free cash flow of JP¥13b, being 106% of its EBIT. So we are not troubled with Shinoken Group's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Shinoken Group , and understanding them should be part of your investment process.

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.

If you decide to trade Shinoken Group, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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@simplywallst.com.