4506 · Sumitomo Pharma

Will it survive?

• Can it pay its interest? 10.5×
  Comfortable
  Operating income ¥107.3B ÷ interest expense ¥10.2B
  What this means

  Operating profit covers interest with the kind of margin Graham wanted for a defensive holding. Necessary, not sufficient, it says solvent, not cheap.

• How heavy is the debt, net of cash? ¥134.7B · 1.3× operating profit
  Modest net debt
  Cash ¥44.3B − debt ¥179.1B
  What this means

  Netting ¥44.3B of cash and short-term investments against ¥179.1B of debt leaves ¥134.7B owed, about 1.3× a year's operating profit (1.7× on the gross debt, before the cash). Net debt is the leverage figure that matters: the cash is already set against the debt. Strategic or illiquid investments aren't counted here.

• How long is cash tied up? 90d
  Long (60+ days)
  DSO 106 + DIO 90 − DPO 105 days
  What this means

  Days cash is tied up between paying suppliers and collecting from customers. Lower is better; a long cycle means growth itself eats cash.

Is it a good business?

• Return on invested capital 9%
  Solid through the cycle
  10-yr median, range -108%–20%; 20% latest = NOPAT ¥84.8B ÷ invested capital ¥427.2B
  Industry peers: median 18%
  What this means

  The rate the business earns on the money tied up in it, Buffett's north star, because over time a stock tracks the ROIC beneath it. Above ~15% sustained hints at a moat; a return below the cost of capital (~8%) erodes value as a business grows rather than building it — the test Buffett weighs most. The headline is the median of the last 10 years (it ran 20% most recently), so one peak or trough year doesn't set the verdict. Asset-light businesses (R&D expensed, little capital) read artificially high, pair this with Owner Earnings.

• Owner-earnings margin 8%
  Solid through the cycle
  9-yr median margin, range -80%–25%; latest ¥67.1B = operating cash ¥71.7B − maintenance capex ¥4.6B
  Industry peers: median 11%
  What this means

  What an owner could take out without starving the business: operating cash less the maintenance capital it must spend to hold its position — Buffett's owner earnings. That's 15% of revenue this year, a 8% median across 9 years.

• Are earnings backed by cash? 0.67×
  Mostly cash-backed
  Cash from ops ¥71.7B ÷ net income ¥106.9B
  What this means

  How much of reported profit showed up as operating cash. Above 1× is reassuring; well below suggests earnings lean on accruals. One year is noisy, growth and working-capital swings distort it, and this is operating cash, not free cash. Watch the multi-year trend.

How is the cash used?

• Where do the earnings go? 0%
  Reinvests most of it
  Dividends + buybacks ¥4M ÷ Owner Earnings ¥67.1B
  What this means

  Of ¥67.1B Owner Earnings, ¥4M (0%) went back to shareholders, ¥2M dividends, ¥2M buybacks. Returning most of it is the mark of a mature business with little left to reinvest at a high return; reinvesting most could mean a long runway, or empire-building. The split doesn't say which; the return earned on it (see ROIC) does.

• Investing or harvesting? 0.22×
  Harvesting
  Capex ¥4.6B ÷ depreciation ¥20.8B
  What this means

  Descriptive, not a grade. Above ~1× means investing faster than assets wear out (growth, or, sustained for years, today's earnings carrying less depreciation than tomorrow's will). Below means spending less than it's wearing out (efficiency, or a melting asset base). The ratio won't tell you which; the filings will.

Durability & moat, 2017–2026

Whether the record’s returns held, and what the capital reinvested earned.

• Profitable years 8 of 10
  What this means

  Lost money in 2 year(s), look at what happened there before trusting the average.

• Return on capital ≥ 15% 3 of 10 yrs
  What this means

  A moat shows up as a high return on invested capital that holds year after year, not one good vintage.

• Operating margin 18% → −27% (3-yr avg ends)
  What this means

  The recent-years average (−27%) sits below the early years (18%), but the latest year (24%) is back near the early level: a cyclical trough dragging the window down, not a one-way slide. The through-cycle median is 13% — read it across the cycle, not on the dip.

• Reinvestment, incremental ROIC returns capital
  What this means

  The capital base barely grew: this business returns cash through dividends and buybacks rather than reinvesting. Judge it on the cash returned, not on compounding.

• Owner earnings growth −6%/yr
  What this means

  Owner earnings shrank about 6% a year over the record.

• Worst year 2024 · −112.8% op. margin
  What this means

  Operations went underwater in 2024, understand why before trusting the good years.

• Share count +0.0%/yr
  What this means

  Roughly flat share count, little dilution, little buyback.

• Dividend record paid
  What this means

  Paid a dividend in 10 of the years on record.