Here's Why Kawasaki Geological Engineering (TSE:4673) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Kawasaki Geological Engineering Co., Ltd. (TSE:4673) makes use of debt. But the real question is whether this debt is making the company risky.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Kawasaki Geological Engineering's Debt?

As you can see below, at the end of May 2025, Kawasaki Geological Engineering had JP¥922.0m of debt, up from JP¥810.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥1.18b in cash, so it actually has JP¥255.0m net cash.

How Strong Is Kawasaki Geological Engineering's Balance Sheet?

The latest balance sheet data shows that Kawasaki Geological Engineering had liabilities of JP¥2.42b due within a year, and liabilities of JP¥994.0m falling due after that. Offsetting these obligations, it had cash of JP¥1.18b as well as receivables valued at JP¥2.89b due within 12 months. So it actually has JP¥660.0m more liquid assets than total liabilities.

It's good to see that Kawasaki Geological Engineering has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Kawasaki Geological Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Kawasaki Geological Engineering

In addition to that, we're happy to report that Kawasaki Geological Engineering has boosted its EBIT by 92%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kawasaki Geological Engineering will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kawasaki Geological Engineering 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. During the last two years, Kawasaki Geological Engineering burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kawasaki Geological Engineering has net cash of JP¥255.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 92% year-on-year EBIT growth. So is Kawasaki Geological Engineering's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Kawasaki Geological Engineering (2 are significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.