Does Sanrio Company (TSE:8136) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Sanrio Company, Ltd. (TSE:8136) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sanrio Company

What Is Sanrio Company's Net Debt?

As you can see below, at the end of June 2024, Sanrio Company had JP¥48.4b of debt, up from JP¥25.8b a year ago. Click the image for more detail. But it also has JP¥93.1b in cash to offset that, meaning it has JP¥44.7b net cash.

How Strong Is Sanrio Company's Balance Sheet?

The latest balance sheet data shows that Sanrio Company had liabilities of JP¥37.9b due within a year, and liabilities of JP¥49.3b falling due after that. Offsetting this, it had JP¥93.1b in cash and JP¥15.1b in receivables that were due within 12 months. So it can boast JP¥21.0b more liquid assets than total liabilities.

This surplus suggests that Sanrio Company has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sanrio Company boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sanrio Company has boosted its EBIT by 89%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sanrio 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Sanrio 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. During the last three years, Sanrio Company produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sanrio Company has net cash of JP¥44.7b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 89% over the last year. So we don't think Sanrio Company's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sanrio Company's earnings per share history for free.

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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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.