SMN (TSE:6185) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that SMN Corporation (TSE:6185) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for SMN

What Is SMN's Net Debt?

The image below, which you can click on for greater detail, shows that SMN had debt of JP¥631.0m at the end of September 2024, a reduction from JP¥1.36b over a year. However, it does have JP¥2.65b in cash offsetting this, leading to net cash of JP¥2.02b.

A Look At SMN's Liabilities

Zooming in on the latest balance sheet data, we can see that SMN had liabilities of JP¥1.87b due within 12 months and liabilities of JP¥130.0m due beyond that. Offsetting this, it had JP¥2.65b in cash and JP¥1.21b in receivables that were due within 12 months. So it can boast JP¥1.86b more liquid assets than total liabilities.

This luscious liquidity implies that SMN's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, SMN boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, SMN turned things around in the last 12 months, delivering and EBIT of JP¥350m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SMN's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SMN 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 last year, SMN 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 SMN has net cash of JP¥2.02b, as well as more liquid assets than liabilities. The cherry on top was that in converted 194% of that EBIT to free cash flow, bringing in JP¥679m. So we don't think SMN's use of debt is risky. 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 3 warning signs for SMN (2 are significant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.