These 4 Measures Indicate That Suido Kiko Kaisha (TYO:6403) Is Using Debt Safely

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Suido Kiko Kaisha, Ltd. (TYO:6403) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Suido Kiko Kaisha

What Is Suido Kiko Kaisha's Net Debt?

The chart below, which you can click on for greater detail, shows that Suido Kiko Kaisha had JP¥474.0m in debt in September 2020; about the same as the year before. However, it does have JP¥4.93b in cash offsetting this, leading to net cash of JP¥4.46b.

How Healthy Is Suido Kiko Kaisha's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suido Kiko Kaisha had liabilities of JP¥7.33b due within 12 months and liabilities of JP¥2.52b due beyond that. On the other hand, it had cash of JP¥4.93b and JP¥6.67b worth of receivables due within a year. So it actually has JP¥1.75b more liquid assets than total liabilities.

It's good to see that Suido Kiko Kaisha has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Suido Kiko Kaisha has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Suido Kiko Kaisha grew its EBIT by 66% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Suido Kiko Kaisha 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Suido Kiko Kaisha 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. Over the last three years, Suido Kiko Kaisha reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Suido Kiko Kaisha has JP¥4.46b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 66% over the last year. So is Suido Kiko Kaisha's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 3 warning signs for Suido Kiko Kaisha (1 can't be ignored!) that you should be aware of before investing here.

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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