We Think SDS HOLDINGSLtd (TSE:1711) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that SDS HOLDINGS Co.,Ltd. (TSE:1711) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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.

Check out our latest analysis for SDS HOLDINGSLtd

How Much Debt Does SDS HOLDINGSLtd Carry?

As you can see below, SDS HOLDINGSLtd had JP¥2.59b of debt at December 2023, down from JP¥3.04b a year prior. However, it does have JP¥261.0m in cash offsetting this, leading to net debt of about JP¥2.33b.

A Look At SDS HOLDINGSLtd's Liabilities

According to the last reported balance sheet, SDS HOLDINGSLtd had liabilities of JP¥1.85b due within 12 months, and liabilities of JP¥1.14b due beyond 12 months. Offsetting this, it had JP¥261.0m in cash and JP¥126.0m in receivables that were due within 12 months. So it has liabilities totalling JP¥2.60b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥4.09b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is SDS HOLDINGSLtd's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year SDS HOLDINGSLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to JP¥3.9b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, SDS HOLDINGSLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost JP¥36m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥323m of cash over the last year. So suffice it to say we consider the stock very 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. We've identified 4 warning signs with SDS HOLDINGSLtd (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.