Does SCREEN Holdings (TSE:7735) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies SCREEN Holdings Co., Ltd. (TSE:7735) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SCREEN Holdings

How Much Debt Does SCREEN Holdings Carry?

As you can see below, SCREEN Holdings had JP¥3.78b of debt at March 2024, down from JP¥25.4b a year prior. However, it does have JP¥197.3b in cash offsetting this, leading to net cash of JP¥193.5b.

A Look At SCREEN Holdings' Liabilities

We can see from the most recent balance sheet that SCREEN Holdings had liabilities of JP¥286.0b falling due within a year, and liabilities of JP¥18.9b due beyond that. On the other hand, it had cash of JP¥197.3b and JP¥107.7b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to SCREEN Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥1.42t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, SCREEN Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that SCREEN Holdings has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. 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 SCREEN Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SCREEN Holdings 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, SCREEN Holdings recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 SCREEN Holdings has net cash of JP¥193.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥56b, being 78% of its EBIT. So is SCREEN Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for SCREEN Holdings that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com