Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies SAMCO Inc. (TSE:6387) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for SAMCO
How Much Debt Does SAMCO Carry?
You can click the graphic below for the historical numbers, but it shows that as of October 2024 SAMCO had JP¥1.09b of debt, an increase on JP¥832.0m, over one year. However, it does have JP¥6.12b in cash offsetting this, leading to net cash of JP¥5.03b.
How Strong Is SAMCO's Balance Sheet?
According to the last reported balance sheet, SAMCO had liabilities of JP¥3.14b due within 12 months, and liabilities of JP¥978.1m due beyond 12 months. Offsetting these obligations, it had cash of JP¥6.12b as well as receivables valued at JP¥1.71b due within 12 months. So it actually has JP¥3.71b more liquid assets than total liabilities.
This surplus suggests that SAMCO has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SAMCO boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that SAMCO has increased its EBIT by 4.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SAMCO 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SAMCO 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. Looking at the most recent three years, SAMCO recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that SAMCO has net cash of JP¥5.03b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 4.0% in the last twelve months. So is SAMCO'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for SAMCO you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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:6387
Excellent balance sheet with moderate growth potential.
