Does Dai-Ichi Cutter Kogyo k.k (TSE:1716) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Dai-Ichi Cutter Kogyo k.k. (TSE:1716) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dai-Ichi Cutter Kogyo k.k

What Is Dai-Ichi Cutter Kogyo k.k's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Dai-Ichi Cutter Kogyo k.k had debt of JP¥243.0m, up from JP¥181.0m in one year. But it also has JP¥8.64b in cash to offset that, meaning it has JP¥8.39b net cash.

How Strong Is Dai-Ichi Cutter Kogyo k.k's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dai-Ichi Cutter Kogyo k.k had liabilities of JP¥2.81b due within 12 months and liabilities of JP¥814.0m due beyond that. Offsetting these obligations, it had cash of JP¥8.64b as well as receivables valued at JP¥4.19b due within 12 months. So it actually has JP¥9.20b more liquid assets than total liabilities.

This luscious liquidity implies that Dai-Ichi Cutter Kogyo k.k's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Dai-Ichi Cutter Kogyo k.k has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Dai-Ichi Cutter Kogyo k.k grew its EBIT at 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dai-Ichi Cutter Kogyo k.k 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. Dai-Ichi Cutter Kogyo k.k 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 most recent three years, Dai-Ichi Cutter Kogyo k.k recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Dai-Ichi Cutter Kogyo k.k has JP¥8.39b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 13% over the last year. So we don't think Dai-Ichi Cutter Kogyo k.k's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Dai-Ichi Cutter Kogyo k.k's earnings per share history for free.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.