Is KOIKE-YA (TYO:2226) 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 can see that KOIKE-YA Inc. (TYO:2226) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KOIKE-YA

What Is KOIKE-YA's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 KOIKE-YA had debt of JP¥1.82b, up from none in one year. But on the other hand it also has JP¥4.96b in cash, leading to a JP¥3.15b net cash position.

A Look At KOIKE-YA's Liabilities

The latest balance sheet data shows that KOIKE-YA had liabilities of JP¥10.6b due within a year, and liabilities of JP¥4.23b falling due after that. On the other hand, it had cash of JP¥4.96b and JP¥7.80b worth of receivables due within a year. So it has liabilities totalling JP¥2.05b more than its cash and near-term receivables, combined.

Of course, KOIKE-YA has a market capitalization of JP¥26.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, KOIKE-YA also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that KOIKE-YA grew its EBIT by 122% 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 it is KOIKE-YA'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. KOIKE-YA 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 three years, KOIKE-YA saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about KOIKE-YA's liabilities, but we can be reassured by the fact it has has net cash of JP¥3.15b. And we liked the look of last year's 122% year-on-year EBIT growth. So we are not troubled with KOIKE-YA's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in KOIKE-YA, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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