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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 can see that Sakuma Exports Limited (NSE:SAKUMA) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
See our latest analysis for Sakuma Exports
What Is Sakuma Exports's Debt?
As you can see below, Sakuma Exports had ₹250.0m of debt at March 2019, down from ₹457.1m a year prior. But it also has ₹545.2m in cash to offset that, meaning it has ₹295.2m net cash.
How Strong Is Sakuma Exports's Balance Sheet?
According to the last reported balance sheet, Sakuma Exports had liabilities of ₹6.15b due within 12 months, and liabilities of ₹210.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹545.2m as well as receivables valued at ₹8.19b due within 12 months. So it actually has ₹2.38b more liquid assets than total liabilities.
This luscious liquidity implies that Sakuma Exports's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Sakuma Exports boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Sakuma Exports grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. 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 Sakuma Exports can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.