Does KIMURA KOHKILtd (TSE:6231) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, KIMURA KOHKI Co.,Ltd. (TSE:6231) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for KIMURA KOHKILtd

How Much Debt Does KIMURA KOHKILtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 KIMURA KOHKILtd had JP¥5.03b of debt, an increase on JP¥3.73b, over one year. However, it does have JP¥1.83b in cash offsetting this, leading to net debt of about JP¥3.20b.

How Strong Is KIMURA KOHKILtd's Balance Sheet?

We can see from the most recent balance sheet that KIMURA KOHKILtd had liabilities of JP¥5.59b falling due within a year, and liabilities of JP¥5.41b due beyond that. Offsetting these obligations, it had cash of JP¥1.83b as well as receivables valued at JP¥6.36b due within 12 months. So its liabilities total JP¥2.82b more than the combination of its cash and short-term receivables.

Of course, KIMURA KOHKILtd has a market capitalization of JP¥17.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

KIMURA KOHKILtd's net debt is only 0.93 times its EBITDA. And its EBIT covers its interest expense a whopping 79.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, KIMURA KOHKILtd grew its EBIT by 142% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is KIMURA KOHKILtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, KIMURA KOHKILtd 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.

Our View

Happily, KIMURA KOHKILtd's impressive interest cover implies it has the upper hand on its debt. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that KIMURA KOHKILtd can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for KIMURA KOHKILtd that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.