We Think Kaken Pharmaceutical (TSE:4521) Can Manage Its Debt With Ease

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. We note that Kaken Pharmaceutical Co., Ltd. (TSE:4521) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Kaken Pharmaceutical's Debt?

As you can see below, Kaken Pharmaceutical had JP¥3.85b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥79.8b in cash, leading to a JP¥75.9b net cash position.

How Strong Is Kaken Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Kaken Pharmaceutical had liabilities of JP¥29.2b due within a year, and liabilities of JP¥8.95b falling due after that. On the other hand, it had cash of JP¥79.8b and JP¥29.9b worth of receivables due within a year. So it can boast JP¥71.5b more liquid assets than total liabilities.

This surplus liquidity suggests that Kaken Pharmaceutical's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Kaken Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Kaken Pharmaceutical

Better yet, Kaken Pharmaceutical grew its EBIT by 482% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kaken Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Kaken Pharmaceutical 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. During the last three years, Kaken Pharmaceutical produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kaken Pharmaceutical has JP¥75.9b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 482% over the last year. At the end of the day we're not concerned about Kaken Pharmaceutical's debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kaken Pharmaceutical 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.

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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.