Is Kaji Technology (TSE:6391) Using Too Much Debt?

Warren Buffett famously said, '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 note that Kaji Technology Corporation (TSE:6391) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kaji Technology

What Is Kaji Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Kaji Technology had debt of JP¥1.42b at the end of June 2024, a reduction from JP¥1.50b over a year. But on the other hand it also has JP¥2.20b in cash, leading to a JP¥776.0m net cash position.

How Strong Is Kaji Technology's Balance Sheet?

We can see from the most recent balance sheet that Kaji Technology had liabilities of JP¥2.34b falling due within a year, and liabilities of JP¥1.88b due beyond that. On the other hand, it had cash of JP¥2.20b and JP¥2.59b worth of receivables due within a year. So it actually has JP¥573.0m more liquid assets than total liabilities.

This surplus suggests that Kaji Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kaji Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Kaji Technology grew its EBIT by 392% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kaji Technology'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Kaji Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Kaji Technology recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kaji Technology has net cash of JP¥776.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 392% over the last year. So we don't think Kaji Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Kaji Technology , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.