These 4 Measures Indicate That KIYO LearningLtd (TSE:7353) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies KIYO Learning Co.,Ltd. (TSE:7353) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for KIYO LearningLtd

How Much Debt Does KIYO LearningLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 KIYO LearningLtd had debt of JP¥557.0m, up from JP¥500.0m in one year. But it also has JP¥2.91b in cash to offset that, meaning it has JP¥2.35b net cash.

How Strong Is KIYO LearningLtd's Balance Sheet?

According to the last reported balance sheet, KIYO LearningLtd had liabilities of JP¥3.04b due within 12 months, and liabilities of JP¥8.00m due beyond 12 months. On the other hand, it had cash of JP¥2.91b and JP¥67.0m worth of receivables due within a year. So its liabilities total JP¥66.0m more than the combination of its cash and short-term receivables.

Given KIYO LearningLtd has a market capitalization of JP¥2.96b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, KIYO LearningLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that KIYO LearningLtd grew its EBIT by 578% 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about KIYO LearningLtd's liabilities, but we can be reassured by the fact it has has net cash of JP¥2.35b. The cherry on top was that in converted 1,257% of that EBIT to free cash flow, bringing in JP¥492m. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for KIYO LearningLtd you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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