We Think Kyodo Public Relations (TSE:2436) Can Manage Its Debt With Ease

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.' 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. As with many other companies Kyodo Public Relations Co., Ltd. (TSE:2436) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kyodo Public Relations

How Much Debt Does Kyodo Public Relations Carry?

The image below, which you can click on for greater detail, shows that Kyodo Public Relations had debt of JP¥766.0m at the end of December 2023, a reduction from JP¥966.0m over a year. However, it does have JP¥2.69b in cash offsetting this, leading to net cash of JP¥1.93b.

How Strong Is Kyodo Public Relations' Balance Sheet?

According to the last reported balance sheet, Kyodo Public Relations had liabilities of JP¥1.53b due within 12 months, and liabilities of JP¥567.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥2.69b as well as receivables valued at JP¥1.23b due within 12 months. So it can boast JP¥1.82b more liquid assets than total liabilities.

It's good to see that Kyodo Public Relations 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 Kyodo Public Relations has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Kyodo Public Relations grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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 Kyodo Public Relations will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. 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 Kyodo Public Relations has net cash of JP¥1.93b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥717m, being 76% of its EBIT. So is Kyodo Public Relations's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Kyodo Public Relations you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.