Is Kura SushiInc (TSE:2695) A Risky Investment?

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 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. We can see that Kura Sushi,Inc. (TSE:2695) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kura SushiInc

What Is Kura SushiInc's Debt?

As you can see below, at the end of October 2023, Kura SushiInc had JP¥927.0m of debt, up from none a year ago. Click the image for more detail. But it also has JP¥20.2b in cash to offset that, meaning it has JP¥19.3b net cash.

How Healthy Is Kura SushiInc's Balance Sheet?

We can see from the most recent balance sheet that Kura SushiInc had liabilities of JP¥26.2b falling due within a year, and liabilities of JP¥33.4b due beyond that. On the other hand, it had cash of JP¥20.2b and JP¥5.16b worth of receivables due within a year. So it has liabilities totalling JP¥34.2b more than its cash and near-term receivables, combined.

Kura SushiInc has a market capitalization of JP¥170.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Kura SushiInc boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Kura SushiInc turned things around in the last 12 months, delivering and EBIT of JP¥2.5b. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kura SushiInc's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kura SushiInc 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. During the last year, Kura SushiInc 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

Although Kura SushiInc'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¥19.3b. So we are not troubled with Kura SushiInc's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kura SushiInc you should know about.

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.