Sansan (TSE:4443) Could Easily Take On More Debt

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 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. We note that Sansan, Inc. (TSE:4443) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sansan

How Much Debt Does Sansan Carry?

You can click the graphic below for the historical numbers, but it shows that as of August 2024 Sansan had JP¥4.27b of debt, an increase on JP¥3.25b, over one year. But it also has JP¥24.1b in cash to offset that, meaning it has JP¥19.9b net cash.

A Look At Sansan's Liabilities

We can see from the most recent balance sheet that Sansan had liabilities of JP¥20.1b falling due within a year, and liabilities of JP¥3.59b due beyond that. Offsetting this, it had JP¥24.1b in cash and JP¥833.0m in receivables that were due within 12 months. So it can boast JP¥1.24b more liquid assets than total liabilities.

This state of affairs indicates that Sansan's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥272.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Sansan boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sansan has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. 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 Sansan 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. Sansan 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 last three years, Sansan actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sansan has net cash of JP¥19.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 567% of that EBIT to free cash flow, bringing in JP¥4.9b. So we don't think Sansan's use of debt is risky. 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. Be aware that Sansan is showing 2 warning signs in our investment analysis , 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.