Kikuchi Seisakusho (TSE:3444) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kikuchi Seisakusho Co., Ltd. (TSE:3444) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kikuchi Seisakusho

What Is Kikuchi Seisakusho's Debt?

The image below, which you can click on for greater detail, shows that Kikuchi Seisakusho had debt of JP¥1.56b at the end of October 2024, a reduction from JP¥1.81b over a year. However, it does have JP¥2.42b in cash offsetting this, leading to net cash of JP¥858.0m.

How Strong Is Kikuchi Seisakusho's Balance Sheet?

The latest balance sheet data shows that Kikuchi Seisakusho had liabilities of JP¥2.23b due within a year, and liabilities of JP¥1.87b falling due after that. Offsetting this, it had JP¥2.42b in cash and JP¥1.20b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥474.0m.

Since publicly traded Kikuchi Seisakusho shares are worth a total of JP¥3.58b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Kikuchi Seisakusho boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kikuchi Seisakusho's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Kikuchi Seisakusho reported revenue of JP¥5.3b, which is a gain of 9.3%, 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 the fact is that over the last twelve months Kikuchi Seisakusho lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥644m of cash and made a loss of JP¥928m. While this does make the company a bit risky, it's important to remember it has net cash of JP¥858.0m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Kikuchi Seisakusho (1 makes us a bit uncomfortable) 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.