Is Akikawa Foods & Farms (TSE:1380) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Akikawa Foods & Farms Co., Ltd. (TSE:1380) makes use of debt. But should shareholders be worried about its use of debt?

Our free stock report includes 3 warning signs investors should be aware of before investing in Akikawa Foods & Farms. Read for free now.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Akikawa Foods & Farms's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Akikawa Foods & Farms had debt of JP¥3.40b, up from JP¥3.04b in one year. On the flip side, it has JP¥696.0m in cash leading to net debt of about JP¥2.70b.

How Strong Is Akikawa Foods & Farms' Balance Sheet?

According to the last reported balance sheet, Akikawa Foods & Farms had liabilities of JP¥2.85b due within 12 months, and liabilities of JP¥2.27b due beyond 12 months. On the other hand, it had cash of JP¥696.0m and JP¥1.25b worth of receivables due within a year. So it has liabilities totalling JP¥3.17b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of JP¥4.42b, so it does suggest shareholders should keep an eye on Akikawa Foods & Farms' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Akikawa Foods & Farms 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.

See our latest analysis for Akikawa Foods & Farms

In the last year Akikawa Foods & Farms wasn't profitable at an EBIT level, but managed to grow its revenue by 5.5%, to JP¥7.8b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Akikawa Foods & Farms produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥120m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥579m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Akikawa Foods & Farms (including 2 which don't sit too well with us) .

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. 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.