Kurogane Kosakusho (TSE:7997) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Kurogane Kosakusho Ltd. (TSE:7997) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kurogane Kosakusho

What Is Kurogane Kosakusho's Debt?

You can click the graphic below for the historical numbers, but it shows that Kurogane Kosakusho had JP¥1.07b of debt in February 2024, down from JP¥2.82b, one year before. However, because it has a cash reserve of JP¥1.00b, its net debt is less, at about JP¥65.0m.

How Healthy Is Kurogane Kosakusho's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kurogane Kosakusho had liabilities of JP¥2.46b due within 12 months and liabilities of JP¥1.38b due beyond that. Offsetting these obligations, it had cash of JP¥1.00b as well as receivables valued at JP¥2.00b due within 12 months. So it has liabilities totalling JP¥834.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Kurogane Kosakusho has a market capitalization of JP¥1.75b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Kurogane Kosakusho will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Kurogane Kosakusho saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Kurogane Kosakusho had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥97m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through JP¥445m of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kurogane Kosakusho you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com