Sanrio Company (TSE:8136) Seems To Use Debt Rather Sparingly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sanrio Company, Ltd. (TSE:8136) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sanrio Company

How Much Debt Does Sanrio Company Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Sanrio Company had JP¥53.1b of debt, an increase on JP¥22.1b, over one year. But on the other hand it also has JP¥98.0b in cash, leading to a JP¥44.9b net cash position.

A Look At Sanrio Company's Liabilities

The latest balance sheet data shows that Sanrio Company had liabilities of JP¥34.2b due within a year, and liabilities of JP¥52.3b falling due after that. On the other hand, it had cash of JP¥98.0b and JP¥14.4b worth of receivables due within a year. So it actually has JP¥26.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Sanrio Company could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sanrio Company boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Sanrio Company grew its EBIT by 116% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sanrio Company can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sanrio Company has net cash of JP¥44.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 116% over the last year. So we don't think Sanrio Company's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Sanrio Company, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.