Kufu Company Holdings (TSE:4376) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Kufu Company Holdings Inc. (TSE:4376) makes use of debt. But the real question is whether this debt is making the company risky.

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Kufu Company Holdings's Net Debt?

As you can see below, Kufu Company Holdings had JP¥3.28b of debt at December 2024, down from JP¥4.80b a year prior. However, its balance sheet shows it holds JP¥6.93b in cash, so it actually has JP¥3.65b net cash.

How Strong Is Kufu Company Holdings' Balance Sheet?

According to the last reported balance sheet, Kufu Company Holdings had liabilities of JP¥5.00b due within 12 months, and liabilities of JP¥1.34b due beyond 12 months. Offsetting these obligations, it had cash of JP¥6.93b as well as receivables valued at JP¥3.10b due within 12 months. So it can boast JP¥3.68b more liquid assets than total liabilities.

This surplus strongly suggests that Kufu Company Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Kufu Company Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Kufu Company Holdings

In fact Kufu Company Holdings's saving grace is its low debt levels, because its EBIT has tanked 39% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kufu Company Holdings 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kufu Company Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Kufu Company Holdings recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kufu Company Holdings has net cash of JP¥3.65b, as well as more liquid assets than liabilities. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in -JP¥962m. So is Kufu Company 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kufu Company Holdings is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.

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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.