Kyudenko (TSE:1959) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, Kyudenko Corporation (TSE:1959) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kyudenko

What Is Kyudenko's Debt?

As you can see below, Kyudenko had JP¥32.0b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥98.5b in cash offsetting this, leading to net cash of JP¥66.6b.

A Look At Kyudenko's Liabilities

We can see from the most recent balance sheet that Kyudenko had liabilities of JP¥195.5b falling due within a year, and liabilities of JP¥16.6b due beyond that. Offsetting this, it had JP¥98.5b in cash and JP¥164.9b in receivables that were due within 12 months. So it can boast JP¥51.3b more liquid assets than total liabilities.

This surplus suggests that Kyudenko has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kyudenko has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Kyudenko grew its EBIT at 18% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kyudenko 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kyudenko 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, Kyudenko recorded free cash flow worth 56% 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 we empathize with investors who find debt concerning, you should keep in mind that Kyudenko has net cash of JP¥66.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 18% over the last year. So is Kyudenko's debt a risk? It doesn't seem so to us. 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 Kyudenko's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com