SCSK (TSE:9719) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 SCSK Corporation (TSE:9719) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SCSK

What Is SCSK's Debt?

As you can see below, SCSK had JP¥31.2b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥149.4b in cash offsetting this, leading to net cash of JP¥118.1b.

How Strong Is SCSK's Balance Sheet?

We can see from the most recent balance sheet that SCSK had liabilities of JP¥105.5b falling due within a year, and liabilities of JP¥63.0b due beyond that. Offsetting this, it had JP¥149.4b in cash and JP¥85.5b in receivables that were due within 12 months. So it can boast JP¥66.4b more liquid assets than total liabilities.

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

And we also note warmly that SCSK grew its EBIT by 11% last year, making its debt load easier to handle. 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 SCSK'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SCSK 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, SCSK recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case SCSK has JP¥118.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥58b, being 85% of its EBIT. So we don't think SCSK's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in SCSK, you may well want to click here to check an interactive graph of its earnings per share history.

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.