Is Shirohato (TSE:3192) Using Debt In A Risky Way?
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. Importantly, Shirohato Co., Ltd. (TSE:3192) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Shirohato's Debt?
As you can see below, Shirohato had JP¥2.07b of debt at August 2025, down from JP¥3.15b a year prior. However, because it has a cash reserve of JP¥601.0m, its net debt is less, at about JP¥1.47b.
A Look At Shirohato's Liabilities
We can see from the most recent balance sheet that Shirohato had liabilities of JP¥2.19b falling due within a year, and liabilities of JP¥633.0m due beyond that. Offsetting these obligations, it had cash of JP¥601.0m as well as receivables valued at JP¥330.0m due within 12 months. So it has liabilities totalling JP¥1.89b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of JP¥2.04b, so it does suggest shareholders should keep an eye on Shirohato's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shirohato's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Check out our latest analysis for Shirohato
Over 12 months, Shirohato saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months Shirohato produced an earnings before interest and tax (EBIT) loss. Indeed, it lost JP¥31m 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. Surprisingly, we note that it actually reported positive free cash flow of JP¥141m and a profit of JP¥522m. So one might argue that there's still a chance it can get things on the right track. 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. To that end, you should learn about the 4 warning signs we've spotted with Shirohato (including 1 which is a bit unpleasant) .
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.