Is Zuiko (TSE:6279) Using Too Much Debt?

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.' 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. We can see that Zuiko Corporation (TSE:6279) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zuiko

What Is Zuiko's Net Debt?

As you can see below, Zuiko had JP¥7.57b of debt, at November 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥15.6b in cash offsetting this, leading to net cash of JP¥8.01b.

How Strong Is Zuiko's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zuiko had liabilities of JP¥8.75b due within 12 months and liabilities of JP¥8.40b due beyond that. Offsetting this, it had JP¥15.6b in cash and JP¥10.2b in receivables that were due within 12 months. So it actually has JP¥8.58b more liquid assets than total liabilities.

It's good to see that Zuiko has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Zuiko 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 Zuiko'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, Zuiko made a loss at the EBIT level, and saw its revenue drop to JP¥19b, which is a fall of 32%. To be frank that doesn't bode well.

So How Risky Is Zuiko?

While Zuiko lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow JP¥3.0b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 2 warning signs for Zuiko (1 is a bit concerning!) 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.