SDS HOLDINGSLtd (TSE:1711) Is Carrying A Fair Bit Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies SDS HOLDINGS Co.,Ltd. (TSE:1711) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for SDS HOLDINGSLtd

What Is SDS HOLDINGSLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that SDS HOLDINGSLtd had JP¥2.62b of debt in September 2024, down from JP¥3.07b, one year before. On the flip side, it has JP¥505.0m in cash leading to net debt of about JP¥2.12b.

A Look At SDS HOLDINGSLtd's Liabilities

According to the last reported balance sheet, SDS HOLDINGSLtd had liabilities of JP¥1.73b due within 12 months, and liabilities of JP¥1.24b due beyond 12 months. On the other hand, it had cash of JP¥505.0m and JP¥81.0m worth of receivables due within a year. So its liabilities total JP¥2.38b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of JP¥2.91b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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.

Over 12 months, SDS HOLDINGSLtd reported revenue of JP¥4.2b, which is a gain of 5.5%, 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

Over the last twelve months SDS HOLDINGSLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥13m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of JP¥160m into a profit. So in short it's a really risky stock. 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. Be aware that SDS HOLDINGSLtd is showing 3 warning signs in our investment analysis , you should know about...

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.