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 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. We can see that SHINTO Holdings, Inc. (TSE:2776) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
See our latest analysis for SHINTO Holdings
What Is SHINTO Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that SHINTO Holdings had debt of JP¥238.0m at the end of April 2024, a reduction from JP¥259.0m over a year. On the flip side, it has JP¥101.0m in cash leading to net debt of about JP¥137.0m.
How Healthy Is SHINTO Holdings' Balance Sheet?
According to the last reported balance sheet, SHINTO Holdings had liabilities of JP¥186.0m due within 12 months, and liabilities of JP¥248.0m due beyond 12 months. On the other hand, it had cash of JP¥101.0m and JP¥555.0m worth of receivables due within a year. So it can boast JP¥222.0m more liquid assets than total liabilities.
This short term liquidity is a sign that SHINTO Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SHINTO Holdings 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.
In the last year SHINTO Holdings had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to JP¥5.0b. That's not what we would hope to see.
Caveat Emptor
Importantly, SHINTO Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥224m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with SHINTO Holdings (at least 2 which are significant) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
About TSE:2776
Excellent balance sheet slight.
