SMN (TSE:6185) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, SMN Corporation (TSE:6185) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for SMN

What Is SMN's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SMN had JP¥1.31b of debt in December 2023, down from JP¥1.53b, one year before. However, its balance sheet shows it holds JP¥2.32b in cash, so it actually has JP¥1.01b net cash.

How Strong Is SMN's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SMN had liabilities of JP¥1.65b due within 12 months and liabilities of JP¥1.28b due beyond that. Offsetting these obligations, it had cash of JP¥2.32b as well as receivables valued at JP¥1.73b due within 12 months. So it can boast JP¥1.13b more liquid assets than total liabilities.

This surplus suggests that SMN is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, SMN boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SMN will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, SMN made a loss at the EBIT level, and saw its revenue drop to JP¥11b, which is a fall of 17%. That's not what we would hope to see.

So How Risky Is SMN?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year SMN had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of JP¥98m and booked a JP¥72m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥1.01b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for SMN (1 is a bit unpleasant) you should be aware of.

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.