Is Smartvalue (TSE:9417) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Smartvalue Co., Ltd. (TSE:9417) does use debt in its business. But is this debt a concern to shareholders?

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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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Smartvalue's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Smartvalue had JP¥1.57b of debt, an increase on JP¥998.0m, over one year. However, because it has a cash reserve of JP¥1.52b, its net debt is less, at about JP¥54.0m.

How Healthy Is Smartvalue's Balance Sheet?

We can see from the most recent balance sheet that Smartvalue had liabilities of JP¥2.72b falling due within a year, and liabilities of JP¥15.7b due beyond that. On the other hand, it had cash of JP¥1.52b and JP¥830.0m worth of receivables due within a year. So it has liabilities totalling JP¥16.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥3.83b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Smartvalue would probably need a major re-capitalization if its creditors were to demand repayment. Smartvalue may have virtually no net debt, but it does have a lot of liabilities. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Smartvalue'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.

See our latest analysis for Smartvalue

Over 12 months, Smartvalue reported revenue of JP¥3.9b, which is a gain of 4.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Smartvalue had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥259m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through JP¥856m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Smartvalue (including 1 which doesn't sit too well with us) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.