We Think Kanda Tsushinki (TYO:1992) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Kanda Tsushinki Co., Ltd. (TYO:1992) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kanda Tsushinki

How Much Debt Does Kanda Tsushinki Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Kanda Tsushinki had debt of JP¥200.0m, up from JP¥190.0m in one year. But it also has JP¥2.25b in cash to offset that, meaning it has JP¥2.05b net cash.

A Look At Kanda Tsushinki's Liabilities

The latest balance sheet data shows that Kanda Tsushinki had liabilities of JP¥1.70b due within a year, and liabilities of JP¥1.26b falling due after that. Offsetting this, it had JP¥2.25b in cash and JP¥766.0m in receivables that were due within 12 months. So it can boast JP¥68.0m more liquid assets than total liabilities.

This surplus suggests that Kanda Tsushinki has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kanda Tsushinki boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Kanda Tsushinki grew its EBIT by 164% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Kanda Tsushinki'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Kanda Tsushinki 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. During the last three years, Kanda Tsushinki produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Kanda Tsushinki has JP¥2.05b in net cash and a decent-looking balance sheet. And we liked the look of last year's 164% year-on-year EBIT growth. So we don't think Kanda Tsushinki's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Kanda Tsushinki that you should be aware of.

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.

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