Kyudenko (TSE:1959) Has A Pretty Healthy Balance Sheet

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, Kyudenko Corporation (TSE:1959) does carry debt. But should shareholders be worried about its use of debt?

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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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Kyudenko's Debt?

You can click the graphic below for the historical numbers, but it shows that Kyudenko had JP¥18.5b of debt in December 2024, down from JP¥32.2b, one year before. However, its balance sheet shows it holds JP¥56.1b in cash, so it actually has JP¥37.6b net cash.

A Look At Kyudenko's Liabilities

The latest balance sheet data shows that Kyudenko had liabilities of JP¥129.2b due within a year, and liabilities of JP¥29.7b falling due after that. Offsetting this, it had JP¥56.1b in cash and JP¥144.1b in receivables that were due within 12 months. So it actually has JP¥41.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Kyudenko could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kyudenko boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Kyudenko

Also good is that Kyudenko grew its EBIT at 11% 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 ultimately the future profitability of the business will decide if Kyudenko 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. While Kyudenko has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Kyudenko's free cash flow amounted to 47% 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 Kyudenko has net cash of JP¥37.6b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 11% in the last twelve months. So is Kyudenko's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Kyudenko has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.