Does KIYO LearningLtd (TSE:7353) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that KIYO Learning Co.,Ltd. (TSE:7353) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for KIYO LearningLtd

What Is KIYO LearningLtd's Debt?

The image below, which you can click on for greater detail, shows that KIYO LearningLtd had debt of JP¥469.0m at the end of December 2023, a reduction from JP¥516.0m over a year. However, it does have JP¥3.19b in cash offsetting this, leading to net cash of JP¥2.73b.

How Healthy Is KIYO LearningLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KIYO LearningLtd had liabilities of JP¥2.86b due within 12 months and liabilities of JP¥8.00m due beyond that. Offsetting these obligations, it had cash of JP¥3.19b as well as receivables valued at JP¥60.0m due within 12 months. So it actually has JP¥382.0m more liquid assets than total liabilities.

This short term liquidity is a sign that KIYO LearningLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that KIYO LearningLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Although KIYO LearningLtd made a loss at the EBIT level, last year, it was also good to see that it generated JP¥136m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is KIYO LearningLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While KIYO LearningLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, KIYO LearningLtd actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KIYO LearningLtd has net cash of JP¥2.73b, as well as more liquid assets than liabilities. The cherry on top was that in converted 362% of that EBIT to free cash flow, bringing in JP¥492m. So is KIYO LearningLtd's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for KIYO LearningLtd you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.