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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Kura Sushi,Inc. (TSE:2695) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kura SushiInc

How Much Debt Does Kura SushiInc Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2024 Kura SushiInc had JP¥947.0m of debt, an increase on JP¥438.0m, over one year. However, its balance sheet shows it holds JP¥22.7b in cash, so it actually has JP¥21.8b net cash.

A Look At Kura SushiInc's Liabilities

The latest balance sheet data shows that Kura SushiInc had liabilities of JP¥29.3b due within a year, and liabilities of JP¥35.6b falling due after that. Offsetting these obligations, it had cash of JP¥22.7b as well as receivables valued at JP¥5.88b due within 12 months. So its liabilities total JP¥36.3b more than the combination of its cash and short-term receivables.

Kura SushiInc has a market capitalization of JP¥160.8b, so it could very likely raise cash to ameliorate 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, Kura SushiInc boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Kura SushiInc made a loss at the EBIT level, last year, it was also good to see that it generated JP¥9.3b in EBIT over the last twelve months. 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 generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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¥21.8b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in JP¥7.5b. So we don't think Kura SushiInc's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Kura SushiInc, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com