Is Sakai Moving ServiceLtd (TSE:9039) 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.' 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 can see that Sakai Moving Service Co.,Ltd. (TSE:9039) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Sakai Moving ServiceLtd

What Is Sakai Moving ServiceLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sakai Moving ServiceLtd had JP¥4.15b of debt, an increase on JP¥3.02b, over one year. However, its balance sheet shows it holds JP¥29.5b in cash, so it actually has JP¥25.4b net cash.

How Healthy Is Sakai Moving ServiceLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sakai Moving ServiceLtd had liabilities of JP¥27.2b due within 12 months and liabilities of JP¥4.30b due beyond that. Offsetting these obligations, it had cash of JP¥29.5b as well as receivables valued at JP¥9.77b due within 12 months. So it can boast JP¥7.81b more liquid assets than total liabilities.

This short term liquidity is a sign that Sakai Moving ServiceLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sakai Moving ServiceLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Sakai Moving ServiceLtd has increased its EBIT by 7.6% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sakai Moving ServiceLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sakai Moving ServiceLtd 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 most recent three years, Sakai Moving ServiceLtd recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sakai Moving ServiceLtd has net cash of JP¥25.4b, as well as more liquid assets than liabilities. So we don't think Sakai Moving ServiceLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Sakai Moving ServiceLtd, 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.