These 4 Measures Indicate That Vital KSK Holdings (TSE:3151) Is Using Debt Safely

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. Importantly, Vital KSK Holdings, Inc. (TSE:3151) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vital KSK Holdings

How Much Debt Does Vital KSK Holdings Carry?

As you can see below, Vital KSK Holdings had JP¥7.68b of debt at March 2024, down from JP¥8.75b a year prior. However, it does have JP¥34.7b in cash offsetting this, leading to net cash of JP¥27.0b.

A Look At Vital KSK Holdings' Liabilities

The latest balance sheet data shows that Vital KSK Holdings had liabilities of JP¥193.4b due within a year, and liabilities of JP¥17.9b falling due after that. Offsetting these obligations, it had cash of JP¥34.7b as well as receivables valued at JP¥134.3b due within 12 months. So its liabilities total JP¥42.3b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of JP¥55.5b, so it does suggest shareholders should keep an eye on Vital KSK Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Vital KSK Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Vital KSK Holdings grew its EBIT by 121% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Vital KSK Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Vital KSK Holdings 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 last three years, Vital KSK Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Vital KSK Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥27.0b. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in JP¥18b. So is Vital KSK Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Vital KSK Holdings has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com