Is SDS HOLDINGSLtd (TSE:1711) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that SDS HOLDINGS Co.,Ltd. (TSE:1711) does use debt in its business. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is SDS HOLDINGSLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 SDS HOLDINGSLtd had JP¥3.51b of debt, an increase on JP¥2.60b, over one year. However, because it has a cash reserve of JP¥499.0m, its net debt is less, at about JP¥3.02b.

How Healthy Is SDS HOLDINGSLtd's Balance Sheet?

We can see from the most recent balance sheet that SDS HOLDINGSLtd had liabilities of JP¥2.29b falling due within a year, and liabilities of JP¥1.68b due beyond that. Offsetting this, it had JP¥499.0m in cash and JP¥66.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥3.40b.

When you consider that this deficiency exceeds the company's JP¥2.82b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SDS HOLDINGSLtd will need earnings to service that debt. 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.

Check out our latest analysis for SDS HOLDINGSLtd

In the last year SDS HOLDINGSLtd had a loss before interest and tax, and actually shrunk its revenue by 2.4%, to JP¥4.0b. That's not what we would hope to see.

Caveat Emptor

Importantly, SDS HOLDINGSLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost JP¥15m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through JP¥1.2b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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 2 warning signs for SDS HOLDINGSLtd you should be aware of, and 1 of them shouldn't be ignored.

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.