Is Seino Holdings (TSE:9076) 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. Importantly, Seino Holdings Co., Ltd. (TSE:9076) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Seino Holdings

What Is Seino Holdings's Debt?

The image below, which you can click on for greater detail, shows that Seino Holdings had debt of JP¥37.3b at the end of March 2024, a reduction from JP¥40.5b over a year. However, its balance sheet shows it holds JP¥83.5b in cash, so it actually has JP¥46.1b net cash.

How Healthy Is Seino Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Seino Holdings had liabilities of JP¥119.8b due within 12 months and liabilities of JP¥134.1b due beyond that. On the other hand, it had cash of JP¥83.5b and JP¥114.1b worth of receivables due within a year. So it has liabilities totalling JP¥56.4b more than its cash and near-term receivables, combined.

Given Seino Holdings has a market capitalization of JP¥386.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Seino Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Seino Holdings has seen its EBIT plunge 18% in the last twelve months. 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 it is future earnings, more than anything, that will determine Seino Holdings'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, a company can only pay off debt with cold hard cash, not accounting profits. Seino Holdings 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. During the last three years, Seino Holdings produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Seino Holdings does have more liabilities than liquid assets, it also has net cash of JP¥46.1b. And it impressed us with free cash flow of JP¥25b, being 70% of its EBIT. So we are not troubled with Seino Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Seino Holdings you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.