We Think KIYO LearningLtd (TSE:7353) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that KIYO Learning Co.,Ltd. (TSE:7353) does use debt in its business. But is this debt a concern to shareholders?

We've discovered 2 warning signs about KIYO LearningLtd. View them for free.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does KIYO LearningLtd Carry?

The image below, which you can click on for greater detail, shows that KIYO LearningLtd had debt of JP¥450.0m at the end of December 2024, a reduction from JP¥469.0m over a year. However, it does have JP¥3.48b in cash offsetting this, leading to net cash of JP¥3.03b.

How Healthy Is KIYO LearningLtd's Balance Sheet?

According to the last reported balance sheet, KIYO LearningLtd had liabilities of JP¥3.06b due within 12 months, and liabilities of JP¥4.00m due beyond 12 months. Offsetting this, it had JP¥3.48b in cash and JP¥74.0m in receivables that were due within 12 months. So it actually has JP¥487.0m more liquid assets than total liabilities.

This surplus suggests that KIYO LearningLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that KIYO LearningLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for KIYO LearningLtd

On top of that, KIYO LearningLtd grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case KIYO LearningLtd has JP¥3.03b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥301m, being 228% of its EBIT. 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. For instance, we've identified 2 warning signs for KIYO LearningLtd that you should be aware of.

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.