These 4 Measures Indicate That Kotobuki Spirits (TSE:2222) Is Using Debt Safely

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 Kotobuki Spirits Co., Ltd. (TSE:2222) does use debt in its business. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Kotobuki Spirits's Net Debt?

As you can see below, Kotobuki Spirits had JP¥300.0m of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥23.0b in cash, leading to a JP¥22.7b net cash position.

A Look At Kotobuki Spirits' Liabilities

According to the last reported balance sheet, Kotobuki Spirits had liabilities of JP¥8.69b due within 12 months, and liabilities of JP¥2.17b due beyond 12 months. Offsetting these obligations, it had cash of JP¥23.0b as well as receivables valued at JP¥5.86b due within 12 months. So it actually has JP¥18.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Kotobuki Spirits could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kotobuki Spirits has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Kotobuki Spirits

Fortunately, Kotobuki Spirits grew its EBIT by 9.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kotobuki Spirits can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kotobuki Spirits 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. Over the most recent three years, Kotobuki Spirits recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kotobuki Spirits has net cash of JP¥22.7b, as well as more liquid assets than liabilities. So is Kotobuki Spirits'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 example - Kotobuki Spirits has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.