Seino Holdings (TSE:9076) Seems To Use Debt Quite Sensibly

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 note that Seino Holdings Co., Ltd. (TSE:9076) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Seino Holdings's Debt?

As you can see below, at the end of December 2024, Seino Holdings had JP¥82.4b of debt, up from JP¥38.0b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥82.9b in cash, so it actually has JP¥426.0m net cash.

A Look At Seino Holdings' Liabilities

According to the last reported balance sheet, Seino Holdings had liabilities of JP¥174.5b due within 12 months, and liabilities of JP¥148.8b due beyond 12 months. Offsetting these obligations, it had cash of JP¥82.9b as well as receivables valued at JP¥126.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥114.4b.

While this might seem like a lot, it is not so bad since Seino Holdings has a market capitalization of JP¥342.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Check out our latest analysis for Seino Holdings

And we also note warmly that Seino Holdings grew its EBIT by 12% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Seino Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Seino Holdings 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. During the last three years, Seino Holdings produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Seino Holdings does have more liabilities than liquid assets, it also has net cash of JP¥426.0m. And it impressed us with free cash flow of JP¥28b, being 70% of its EBIT. So we don't think Seino Holdings'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. For example - Seino Holdings has 1 warning sign we think you should be aware of.

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. 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.