Is Showa Shinku (TYO:6384) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Showa Shinku Co., Ltd. (TYO:6384) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Showa Shinku

How Much Debt Does Showa Shinku Carry?

The chart below, which you can click on for greater detail, shows that Showa Shinku had JP¥549.0m in debt in December 2020; about the same as the year before. But it also has JP¥2.94b in cash to offset that, meaning it has JP¥2.39b net cash.

A Look At Showa Shinku's Liabilities

According to the last reported balance sheet, Showa Shinku had liabilities of JP¥3.86b due within 12 months, and liabilities of JP¥362.0m due beyond 12 months. On the other hand, it had cash of JP¥2.94b and JP¥4.56b worth of receivables due within a year. So it actually has JP¥3.28b more liquid assets than total liabilities.

It's good to see that Showa Shinku has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Showa Shinku 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 Showa Shinku has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Showa Shinku's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Showa Shinku 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 most recent three years, Showa Shinku recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Showa Shinku has JP¥2.39b in net cash and a decent-looking balance sheet. And we liked the look of last year's 32% year-on-year EBIT growth. So we don't think Showa Shinku's use of debt is risky. 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. Be aware that Showa Shinku is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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. 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.
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