Kyodo Public Relations (TYO:2436) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Kyodo Public Relations Co., Ltd. (TYO:2436) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kyodo Public Relations

How Much Debt Does Kyodo Public Relations Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Kyodo Public Relations had JP¥523.0m of debt, an increase on JP¥139.0m, over one year. However, its balance sheet shows it holds JP¥1.53b in cash, so it actually has JP¥1.01b net cash.

How Strong Is Kyodo Public Relations' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kyodo Public Relations had liabilities of JP¥890.0m due within 12 months and liabilities of JP¥347.0m due beyond that. Offsetting this, it had JP¥1.53b in cash and JP¥792.0m in receivables that were due within 12 months. So it actually has JP¥1.09b more liquid assets than total liabilities.

This excess liquidity is a great indication that Kyodo Public Relations' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Kyodo Public Relations has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Kyodo Public Relations if management cannot prevent a repeat of the 69% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Kyodo Public Relations's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kyodo Public Relations 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. During the last three years, Kyodo Public Relations generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Kyodo Public Relations has JP¥1.01b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥355m, being 92% of its EBIT. So is Kyodo Public Relations'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 instance, we've identified 4 warning signs for Kyodo Public Relations that 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.

When trading Kyodo Public Relations or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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