Sigmakoki (TYO:7713) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Sigmakoki Co., Ltd. (TYO:7713) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sigmakoki

What Is Sigmakoki's Debt?

You can click the graphic below for the historical numbers, but it shows that as of November 2020 Sigmakoki had JP¥1.19b of debt, an increase on JP¥769.0m, over one year. But it also has JP¥4.91b in cash to offset that, meaning it has JP¥3.73b net cash.

A Look At Sigmakoki's Liabilities

Zooming in on the latest balance sheet data, we can see that Sigmakoki had liabilities of JP¥2.24b due within 12 months and liabilities of JP¥1.32b due beyond that. Offsetting these obligations, it had cash of JP¥4.91b as well as receivables valued at JP¥2.57b due within 12 months. So it can boast JP¥3.92b more liquid assets than total liabilities.

This excess liquidity is a great indication that Sigmakoki's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Sigmakoki has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Sigmakoki's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sigmakoki can strengthen its balance sheet over time. 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. Sigmakoki 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. Looking at the most recent three years, Sigmakoki recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sigmakoki has net cash of JP¥3.73b, as well as more liquid assets than liabilities. So we are not troubled with Sigmakoki's debt use. 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. Be aware that Sigmakoki is showing 1 warning sign in our investment analysis , you should know about...

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. 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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