Is SmartDrive (TSE:5137) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that SmartDrive inc. (TSE:5137) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SmartDrive

What Is SmartDrive's Net Debt?

As you can see below, SmartDrive had JP¥530.0m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥1.04b in cash, so it actually has JP¥508.0m net cash.

How Healthy Is SmartDrive's Balance Sheet?

The latest balance sheet data shows that SmartDrive had liabilities of JP¥574.0m due within a year, and liabilities of JP¥531.0m falling due after that. Offsetting these obligations, it had cash of JP¥1.04b as well as receivables valued at JP¥323.0m due within 12 months. So it actually has JP¥256.0m more liquid assets than total liabilities.

This surplus suggests that SmartDrive has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SmartDrive has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, SmartDrive turned things around in the last 12 months, delivering and EBIT of JP¥158m. 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 SmartDrive 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. SmartDrive 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. During the last year, SmartDrive burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SmartDrive has net cash of JP¥508.0m, as well as more liquid assets than liabilities. So we are not troubled with SmartDrive's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for SmartDrive (1 is a bit concerning) 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.