Koatsu Gas Kogyo (TSE:4097) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Koatsu Gas Kogyo Co., Ltd. (TSE:4097) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Koatsu Gas Kogyo

What Is Koatsu Gas Kogyo's Debt?

As you can see below, Koatsu Gas Kogyo had JP¥11.6b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥28.2b in cash, so it actually has JP¥16.6b net cash.

How Healthy Is Koatsu Gas Kogyo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Koatsu Gas Kogyo had liabilities of JP¥29.8b due within 12 months and liabilities of JP¥14.1b due beyond that. Offsetting these obligations, it had cash of JP¥28.2b as well as receivables valued at JP¥27.9b due within 12 months. So it actually has JP¥12.1b more liquid assets than total liabilities.

It's good to see that Koatsu Gas Kogyo has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Koatsu Gas Kogyo has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Koatsu Gas Kogyo grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Koatsu Gas Kogyo 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Koatsu Gas Kogyo 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. In the last three years, Koatsu Gas Kogyo created free cash flow amounting to 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Koatsu Gas Kogyo has net cash of JP¥16.6b, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we don't think Koatsu Gas Kogyo's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Koatsu Gas Kogyo's earnings per share history for free.

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.