LuckLand (TSE:9612) Seems To Use Debt Quite Sensibly

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.' 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 LuckLand Co., Ltd. (TSE:9612) does use debt in its business. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is LuckLand's Net Debt?

The image below, which you can click on for greater detail, shows that LuckLand had debt of JP¥4.53b at the end of March 2025, a reduction from JP¥5.82b over a year. But on the other hand it also has JP¥5.16b in cash, leading to a JP¥628.0m net cash position.

A Look At LuckLand's Liabilities

We can see from the most recent balance sheet that LuckLand had liabilities of JP¥14.1b falling due within a year, and liabilities of JP¥920.0m due beyond that. Offsetting these obligations, it had cash of JP¥5.16b as well as receivables valued at JP¥7.92b due within 12 months. So it has liabilities totalling JP¥1.95b more than its cash and near-term receivables, combined.

Of course, LuckLand has a market capitalization of JP¥13.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, LuckLand also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for LuckLand

On top of that, LuckLand grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since LuckLand 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While LuckLand 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. Looking at the most recent two years, LuckLand recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While LuckLand does have more liabilities than liquid assets, it also has net cash of JP¥628.0m. And we liked the look of last year's 30% year-on-year EBIT growth. So is LuckLand's debt a risk? It doesn't seem so to us. 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. For example LuckLand has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.