Is KIYO LearningLtd (TSE:7353) Using Too Much 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. We can see that KIYO Learning Co.,Ltd. (TSE:7353) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for KIYO LearningLtd

What Is KIYO LearningLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that KIYO LearningLtd had JP¥451.0m of debt in September 2024, down from JP¥480.0m, one year before. But on the other hand it also has JP¥3.23b in cash, leading to a JP¥2.78b net cash position.

How Strong Is KIYO LearningLtd's Balance Sheet?

The latest balance sheet data shows that KIYO LearningLtd had liabilities of JP¥2.88b due within a year, and liabilities of JP¥5.00m falling due after that. Offsetting this, it had JP¥3.23b in cash and JP¥81.0m in receivables that were due within 12 months. So it actually has JP¥430.0m 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. Succinctly put, KIYO LearningLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that KIYO LearningLtd grew its EBIT by 346% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KIYO LearningLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. KIYO LearningLtd 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 two years, KIYO LearningLtd actually produced more free cash flow than EBIT. 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¥2.78b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥102m, being 183% of its EBIT. So we don't think KIYO LearningLtd's use of debt is risky. 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. For example KIYO LearningLtd has 2 warning signs (and 1 which is concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.