Is Kikuchi Seisakusho (TYO:3444) Weighed On By Its Debt Load?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Kikuchi Seisakusho Co., Ltd. (TYO:3444) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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 Kikuchi Seisakusho

How Much Debt Does Kikuchi Seisakusho Carry?

The image below, which you can click on for greater detail, shows that at January 2021 Kikuchi Seisakusho had debt of JP¥1.20b, up from JP¥882.0m in one year. But on the other hand it also has JP¥1.74b in cash, leading to a JP¥546.0m net cash position.

How Strong Is Kikuchi Seisakusho's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kikuchi Seisakusho had liabilities of JP¥2.04b due within 12 months and liabilities of JP¥1.78b due beyond that. On the other hand, it had cash of JP¥1.74b and JP¥1.12b worth of receivables due within a year. So its liabilities total JP¥956.0m more than the combination of its cash and short-term receivables.

Of course, Kikuchi Seisakusho has a market capitalization of JP¥10.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Kikuchi Seisakusho also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kikuchi Seisakusho will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Kikuchi Seisakusho had a loss before interest and tax, and actually shrunk its revenue by 19%, to JP¥4.5b. We would much prefer see growth.

So How Risky Is Kikuchi Seisakusho?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Kikuchi Seisakusho had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥469m of cash and made a loss of JP¥1.1b. Given it only has net cash of JP¥546.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Kikuchi Seisakusho that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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