We Think SCREEN Holdings (TSE:7735) 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.' 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 SCREEN Holdings Co., Ltd. (TSE:7735) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SCREEN Holdings

How Much Debt Does SCREEN Holdings Carry?

As you can see below, SCREEN Holdings had JP¥2.19b of debt at September 2024, down from JP¥25.3b a year prior. However, its balance sheet shows it holds JP¥199.9b in cash, so it actually has JP¥197.7b net cash.

A Look At SCREEN Holdings' Liabilities

The latest balance sheet data shows that SCREEN Holdings had liabilities of JP¥256.2b due within a year, and liabilities of JP¥16.8b falling due after that. On the other hand, it had cash of JP¥199.9b and JP¥73.6b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that SCREEN Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥829.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that SCREEN Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, SCREEN Holdings grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 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. 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. Over the most recent three years, SCREEN Holdings recorded free cash flow worth 61% 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¥197.7b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 48% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with SCREEN Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.