Kuze (TSE:2708) Seems To Use Debt Quite Sensibly

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.' 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 Kuze Co., Ltd. (TSE:2708) does use debt in its business. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. 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. 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.

What Is Kuze's Debt?

The image below, which you can click on for greater detail, shows that Kuze had debt of JP¥2.12b at the end of December 2024, a reduction from JP¥4.62b over a year. But it also has JP¥6.38b in cash to offset that, meaning it has JP¥4.27b net cash.

A Look At Kuze's Liabilities

We can see from the most recent balance sheet that Kuze had liabilities of JP¥18.3b falling due within a year, and liabilities of JP¥1.68b due beyond that. Offsetting these obligations, it had cash of JP¥6.38b as well as receivables valued at JP¥9.02b due within 12 months. So it has liabilities totalling JP¥4.59b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Kuze is worth JP¥8.31b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Kuze boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Kuze

In fact Kuze's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kuze'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 company can only pay off debt with cold hard cash, not accounting profits. While Kuze 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. Over the last three years, Kuze actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Kuze's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥4.27b. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in JP¥32m. So we don't have any problem with Kuze's use of debt. 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. Be aware that Kuze is showing 3 warning signs in our investment analysis , 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.

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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.