Is KandenkoLtd (TSE:1942) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Kandenko Co.,Ltd. (TSE:1942) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KandenkoLtd

How Much Debt Does KandenkoLtd Carry?

As you can see below, KandenkoLtd had JP¥11.9b of debt at September 2024, down from JP¥12.7b a year prior. However, it does have JP¥89.7b in cash offsetting this, leading to net cash of JP¥77.8b.

A Look At KandenkoLtd's Liabilities

The latest balance sheet data shows that KandenkoLtd had liabilities of JP¥150.4b due within a year, and liabilities of JP¥28.4b falling due after that. Offsetting this, it had JP¥89.7b in cash and JP¥178.9b in receivables that were due within 12 months. So it actually has JP¥89.8b more liquid assets than total liabilities.

This excess liquidity suggests that KandenkoLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, KandenkoLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that KandenkoLtd has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if KandenkoLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KandenkoLtd has net cash of JP¥77.8b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 45% over the last year. So we don't think KandenkoLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in KandenkoLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.