Is Kikuchi Seisakusho (TSE:3444) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Kikuchi Seisakusho Co., Ltd. (TSE:3444) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. 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. 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.

What Is Kikuchi Seisakusho's Net Debt?

The image below, which you can click on for greater detail, shows that Kikuchi Seisakusho had debt of JP¥1.50b at the end of January 2025, a reduction from JP¥1.83b over a year. But it also has JP¥2.10b in cash to offset that, meaning it has JP¥605.0m net cash.

A Look At Kikuchi Seisakusho's Liabilities

We can see from the most recent balance sheet that Kikuchi Seisakusho had liabilities of JP¥2.30b falling due within a year, and liabilities of JP¥1.92b due beyond that. Offsetting these obligations, it had cash of JP¥2.10b as well as receivables valued at JP¥1.33b due within 12 months. So its liabilities total JP¥779.0m more than the combination of its cash and short-term receivables.

Kikuchi Seisakusho has a market capitalization of JP¥3.71b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Kikuchi Seisakusho also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kikuchi Seisakusho will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Kikuchi Seisakusho

Over 12 months, Kikuchi Seisakusho reported revenue of JP¥5.2b, which is a gain of 2.2%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Kikuchi Seisakusho?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Kikuchi Seisakusho had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of JP¥644m and booked a JP¥754m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥605.0m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kikuchi Seisakusho is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.