Stock Analysis
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for KandenkoLtd
What Is KandenkoLtd's Net Debt?
You can click the graphic below for the historical numbers, but it shows that KandenkoLtd had JP¥14.2b of debt in June 2024, down from JP¥15.1b, one year before. But on the other hand it also has JP¥78.2b in cash, leading to a JP¥64.1b net cash position.
A Look At KandenkoLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that KandenkoLtd had liabilities of JP¥136.7b due within 12 months and liabilities of JP¥28.1b due beyond that. On the other hand, it had cash of JP¥78.2b and JP¥169.4b worth of receivables due within a year. So it can boast JP¥82.8b more liquid assets than total liabilities.
This excess liquidity suggests that KandenkoLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, KandenkoLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, KandenkoLtd grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
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. Over the last three years, KandenkoLtd reported free cash flow worth 13% 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 we empathize with investors who find debt concerning, you should keep in mind that KandenkoLtd has net cash of JP¥64.1b, as well as more liquid assets than liabilities. And we liked the look of last year's 32% year-on-year EBIT growth. So we don't think KandenkoLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for KandenkoLtd that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About TSE:1942
KandenkoLtd
Operates as a general infrastructure company in Japan.