Kobe Bussan (TSE:3038) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Kobe Bussan Co., Ltd. (TSE:3038) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Kobe Bussan

How Much Debt Does Kobe Bussan Carry?

The image below, which you can click on for greater detail, shows that Kobe Bussan had debt of JP¥37.0b at the end of July 2024, a reduction from JP¥41.7b over a year. But on the other hand it also has JP¥97.7b in cash, leading to a JP¥60.7b net cash position.

How Strong Is Kobe Bussan's Balance Sheet?

The latest balance sheet data shows that Kobe Bussan had liabilities of JP¥52.5b due within a year, and liabilities of JP¥45.6b falling due after that. Offsetting these obligations, it had cash of JP¥97.7b as well as receivables valued at JP¥26.8b due within 12 months. So it actually has JP¥26.4b 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!

Also good is that Kobe Bussan grew its EBIT at 16% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kobe Bussan can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 56% 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¥60.7b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So we don't think Kobe Bussan's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Kobe Bussan, you may well want to click here to check an interactive graph of its earnings per share history.

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.