Kikuchi Seisakusho (TYO:3444) Has Debt But No Earnings; Should You Worry?

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 Kikuchi Seisakusho Co., Ltd. (TYO:3444) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kikuchi Seisakusho

What Is Kikuchi Seisakusho's Net Debt?

As you can see below, at the end of October 2020, Kikuchi Seisakusho had JP¥1.22b of debt, up from JP¥897.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥1.67b in cash, so it actually has JP¥448.0m net cash.

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¥1.89b due within 12 months and liabilities of JP¥1.57b due beyond that. Offsetting this, it had JP¥1.67b in cash and JP¥1.05b in receivables that were due within 12 months. So its liabilities total JP¥740.0m more than the combination of its cash and short-term receivables.

Of course, Kikuchi Seisakusho has a market capitalization of JP¥10.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Kikuchi Seisakusho boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Kikuchi Seisakusho's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Kikuchi Seisakusho made a loss at the EBIT level, and saw its revenue drop to JP¥4.5b, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is Kikuchi Seisakusho?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Kikuchi Seisakusho lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥534m of cash and made a loss of JP¥1.1b. With only JP¥448.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Kikuchi Seisakusho's profit, revenue, and operating cashflow have changed over the last few years.

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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