Here's Why Kobe Bussan (TSE:3038) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Kobe Bussan Co., Ltd. (TSE:3038) does carry debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Kobe Bussan's Net Debt?

As you can see below, Kobe Bussan had JP¥36.8b of debt, at January 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥109.8b in cash, leading to a JP¥72.9b net cash position.

How Strong Is Kobe Bussan's Balance Sheet?

According to the last reported balance sheet, Kobe Bussan had liabilities of JP¥50.1b due within 12 months, and liabilities of JP¥41.0b due beyond 12 months. Offsetting this, it had JP¥109.8b in cash and JP¥25.9b in receivables that were due within 12 months. So it actually has JP¥44.6b more liquid assets than total liabilities.

This short term liquidity is a sign that Kobe Bussan could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kobe Bussan boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Kobe Bussan

Fortunately, Kobe Bussan grew its EBIT by 6.2% 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 ultimately the future profitability of the business will decide if Kobe Bussan can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Kobe Bussan 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 most recent three years, Kobe Bussan recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kobe Bussan has net cash of JP¥72.9b, as well as more liquid assets than liabilities. So we don't think Kobe Bussan's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Kobe Bussan's earnings per share history for 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.