Kotobukiya (TSE:7809) Has A Pretty Healthy Balance Sheet

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. Importantly, Kotobukiya Co., Ltd. (TSE:7809) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Kotobukiya's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kotobukiya had JP¥2.97b of debt in December 2024, down from JP¥3.24b, one year before. However, it does have JP¥3.17b in cash offsetting this, leading to net cash of JP¥197.0m.

How Healthy Is Kotobukiya's Balance Sheet?

The latest balance sheet data shows that Kotobukiya had liabilities of JP¥2.53b due within a year, and liabilities of JP¥2.35b falling due after that. Offsetting these obligations, it had cash of JP¥3.17b as well as receivables valued at JP¥1.53b due within 12 months. So it has liabilities totalling JP¥177.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that Kotobukiya's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥11.5b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Kotobukiya also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Kotobukiya

Fortunately, Kotobukiya grew its EBIT by 2.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kotobukiya's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kotobukiya 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. During the last three years, Kotobukiya produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kotobukiya has JP¥197.0m in net cash. So is Kotobukiya's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Kotobukiya that you should be aware of before investing here.

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.

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.