We Think Sanrio Company (TSE:8136) Can Manage Its Debt With Ease

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.' 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, Sanrio Company, Ltd. (TSE:8136) does carry debt. But is this debt a concern to shareholders?

We've discovered 1 warning sign about Sanrio Company. View them for free.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Sanrio Company Carry?

The image below, which you can click on for greater detail, shows that Sanrio Company had debt of JP¥44.6b at the end of December 2024, a reduction from JP¥53.1b over a year. However, it does have JP¥104.0b in cash offsetting this, leading to net cash of JP¥59.4b.

How Healthy Is Sanrio Company's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sanrio Company had liabilities of JP¥42.6b due within 12 months and liabilities of JP¥47.5b due beyond that. Offsetting this, it had JP¥104.0b in cash and JP¥23.6b in receivables that were due within 12 months. So it actually has JP¥37.5b 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!

Check out our latest analysis for Sanrio Company

In addition to that, we're happy to report that Sanrio Company has boosted its EBIT by 94%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sanrio Company can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sanrio Company has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Sanrio Company recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sanrio Company has JP¥59.4b in net cash and a decent-looking balance sheet. And we liked the look of last year's 94% year-on-year EBIT growth. So is Sanrio Company's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Sanrio Company , and understanding them should be part of your investment process.

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.