Does KandenkoLtd (TSE:1942) Have A Healthy Balance Sheet?

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 note that Kandenko Co.,Ltd. (TSE:1942) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is KandenkoLtd's Debt?

The image below, which you can click on for greater detail, shows that KandenkoLtd had debt of JP¥23.6b at the end of December 2024, a reduction from JP¥29.7b over a year. However, it does have JP¥64.9b in cash offsetting this, leading to net cash of JP¥41.3b.

A Look At KandenkoLtd's Liabilities

According to the last reported balance sheet, KandenkoLtd had liabilities of JP¥168.1b due within 12 months, and liabilities of JP¥28.3b due beyond 12 months. Offsetting this, it had JP¥64.9b in cash and JP¥220.3b in receivables that were due within 12 months. So it can boast JP¥88.7b more liquid assets than total liabilities.

This surplus suggests that KandenkoLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that KandenkoLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for KandenkoLtd

In addition to that, we're happy to report that KandenkoLtd has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine KandenkoLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. KandenkoLtd 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. In the last three years, KandenkoLtd's free cash flow amounted to 22% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case KandenkoLtd has JP¥41.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 60% year-on-year EBIT growth. So we don't think KandenkoLtd's use of debt is risky. Given KandenkoLtd has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link .

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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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.