Is KURADASHI.Co.Ltd (TSE:5884) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies KURADASHI.Co.,Ltd. (TSE:5884) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for KURADASHI.Co.Ltd

What Is KURADASHI.Co.Ltd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 KURADASHI.Co.Ltd had debt of JP¥778.0m, up from JP¥63.0m in one year. However, its balance sheet shows it holds JP¥1.03b in cash, so it actually has JP¥255.0m net cash.

A Look At KURADASHI.Co.Ltd's Liabilities

We can see from the most recent balance sheet that KURADASHI.Co.Ltd had liabilities of JP¥786.0m falling due within a year, and liabilities of JP¥291.0m due beyond that. Offsetting these obligations, it had cash of JP¥1.03b as well as receivables valued at JP¥97.0m due within 12 months. So it actually has JP¥53.0m more liquid assets than total liabilities.

This state of affairs indicates that KURADASHI.Co.Ltd'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¥3.08b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that KURADASHI.Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since KURADASHI.Co.Ltd will need earnings to service that debt. 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.

In the last year KURADASHI.Co.Ltd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.0%, to JP¥3.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is KURADASHI.Co.Ltd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months KURADASHI.Co.Ltd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥123m and booked a JP¥54m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥255.0m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that KURADASHI.Co.Ltd is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.