Health Check: How Prudently Does Johnan Academic Preparatory Institute (TSE:4720) Use Debt?

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.' 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. We note that Johnan Academic Preparatory Institute, Inc. (TSE:4720) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Johnan Academic Preparatory Institute Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Johnan Academic Preparatory Institute had JP¥989.0m of debt, an increase on JP¥752.0m, over one year. But on the other hand it also has JP¥1.32b in cash, leading to a JP¥329.0m net cash position.

A Look At Johnan Academic Preparatory Institute's Liabilities

According to the last reported balance sheet, Johnan Academic Preparatory Institute had liabilities of JP¥1.63b due within 12 months, and liabilities of JP¥1.89b due beyond 12 months. Offsetting these obligations, it had cash of JP¥1.32b as well as receivables valued at JP¥165.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥2.04b.

This deficit is considerable relative to its market capitalization of JP¥2.35b, so it does suggest shareholders should keep an eye on Johnan Academic Preparatory Institute's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Johnan Academic Preparatory Institute also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Johnan Academic Preparatory Institute's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for Johnan Academic Preparatory Institute

Over 12 months, Johnan Academic Preparatory Institute made a loss at the EBIT level, and saw its revenue drop to JP¥5.6b, which is a fall of 2.5%. That's not what we would hope to see.

So How Risky Is Johnan Academic Preparatory Institute?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Johnan Academic Preparatory Institute had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥197m of cash and made a loss of JP¥357m. But the saving grace is the JP¥329.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Johnan Academic Preparatory Institute , and understanding them should be part of your investment process.

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.