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.' 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. Importantly, SICC Co., Ltd. (SHSE:688234) does carry 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does SICC Carry?

The image below, which you can click on for greater detail, shows that at September 2024 SICC had debt of CN¥500.0m, up from none in one year. But on the other hand it also has CN¥1.03b in cash, leading to a CN¥525.1m net cash position.

A Look At SICC's Liabilities

According to the last reported balance sheet, SICC had liabilities of CN¥1.37b due within 12 months, and liabilities of CN¥489.4m due beyond 12 months. On the other hand, it had cash of CN¥1.03b and CN¥496.2m worth of receivables due within a year. So it has liabilities totalling CN¥338.5m more than its cash and near-term receivables, combined.

This state of affairs indicates that SICC's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥23.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, SICC boasts net cash, so it's fair to say it does not have a heavy debt load!

Although SICC made a loss at the EBIT level, last year, it was also good to see that it generated CN¥99m in EBIT over the last twelve months. 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 SICC 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SICC 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. Over the last year, SICC saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about SICC's liabilities, but we can be reassured by the fact it has has net cash of CN¥525.1m. So we are not troubled with SICC'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. Be aware that SICC is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.