Is KOZO HoldingsLtd (TSE:9973) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that KOZO Holdings Co.,Ltd. (TSE:9973) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for KOZO HoldingsLtd

How Much Debt Does KOZO HoldingsLtd Carry?

As you can see below, KOZO HoldingsLtd had JP¥1.16b of debt at June 2024, down from JP¥1.26b a year prior. However, it does have JP¥960.0m in cash offsetting this, leading to net debt of about JP¥199.0m.

How Strong Is KOZO HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, KOZO HoldingsLtd had liabilities of JP¥3.44b due within 12 months, and liabilities of JP¥2.03b due beyond 12 months. Offsetting these obligations, it had cash of JP¥960.0m as well as receivables valued at JP¥1.31b due within 12 months. So it has liabilities totalling JP¥3.20b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of JP¥5.28b, so it does suggest shareholders should keep an eye on KOZO HoldingsLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since KOZO HoldingsLtd 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.

In the last year KOZO HoldingsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to JP¥17b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate KOZO HoldingsLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at JP¥343m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of JP¥495m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example KOZO HoldingsLtd has 4 warning signs (and 2 which are concerning) we think 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.