Sanyei (TYO:8119) Is Carrying A Fair Bit Of 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sanyei Corporation (TYO:8119) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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 Sanyei

How Much Debt Does Sanyei Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Sanyei had JP¥5.48b of debt, an increase on JP¥4.40b, over one year. However, it does have JP¥2.62b in cash offsetting this, leading to net debt of about JP¥2.87b.

How Strong Is Sanyei's Balance Sheet?

We can see from the most recent balance sheet that Sanyei had liabilities of JP¥6.12b falling due within a year, and liabilities of JP¥3.86b due beyond that. On the other hand, it had cash of JP¥2.62b and JP¥3.50b worth of receivables due within a year. So it has liabilities totalling JP¥3.86b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥5.04b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sanyei 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.

In the last year Sanyei had a loss before interest and tax, and actually shrunk its revenue by 19%, to JP¥35b. We would much prefer see growth.

Caveat Emptor

Not only did Sanyei's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at JP¥123m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥1.1b of cash over the last year. So suffice it to say we consider the stock very 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. Be aware that Sanyei is showing 3 warning signs in our investment analysis , and 2 of those are significant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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