We Think Kura SushiInc (TSE:2695) Can Stay On Top Of Its Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Kura Sushi,Inc. (TSE:2695) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Kura SushiInc

What Is Kura SushiInc's Debt?

You can click the graphic below for the historical numbers, but it shows that as of July 2024 Kura SushiInc had JP¥990.0m of debt, an increase on JP¥466.0m, over one year. However, it does have JP¥23.5b in cash offsetting this, leading to net cash of JP¥22.5b.

A Look At Kura SushiInc's Liabilities

Zooming in on the latest balance sheet data, we can see that Kura SushiInc had liabilities of JP¥30.6b due within 12 months and liabilities of JP¥37.1b due beyond that. Offsetting this, it had JP¥23.5b in cash and JP¥6.29b in receivables that were due within 12 months. So it has liabilities totalling JP¥37.8b more than its cash and near-term receivables, combined.

Kura SushiInc has a market capitalization of JP¥156.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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¥9.2b. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last year, Kura SushiInc recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While Kura SushiInc does have more liabilities than liquid assets, it also has net cash of JP¥22.5b. The cherry on top was that in converted 82% 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.