Is SCREEN Holdings (TSE:7735) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies SCREEN Holdings Co., Ltd. (TSE:7735) makes use of debt. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is SCREEN Holdings's Debt?

The image below, which you can click on for greater detail, shows that SCREEN Holdings had debt of JP¥1.44b at the end of June 2025, a reduction from JP¥3.75b over a year. However, it does have JP¥169.6b in cash offsetting this, leading to net cash of JP¥168.1b.

How Healthy Is SCREEN Holdings' Balance Sheet?

The latest balance sheet data shows that SCREEN Holdings had liabilities of JP¥215.4b due within a year, and liabilities of JP¥11.5b falling due after that. Offsetting this, it had JP¥169.6b in cash and JP¥86.1b in receivables that were due within 12 months. So it actually has JP¥28.7b more liquid assets than total liabilities.

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

View our latest analysis for SCREEN Holdings

Also positive, SCREEN Holdings grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SCREEN Holdings'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 company can only pay off debt with cold hard cash, not accounting profits. SCREEN Holdings 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, SCREEN Holdings recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SCREEN Holdings has net cash of JP¥168.1b, as well as more liquid assets than liabilities. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't think SCREEN Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for SCREEN Holdings you should know about.

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.