Is Koukandekirukun (TSE:7695) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Koukandekirukun, Inc. (TSE:7695) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Koukandekirukun

What Is Koukandekirukun's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Koukandekirukun had debt of JP¥473.0m, up from JP¥247.0m in one year. But it also has JP¥478.0m in cash to offset that, meaning it has JP¥5.00m net cash.

How Healthy Is Koukandekirukun's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Koukandekirukun had liabilities of JP¥1.52b due within 12 months and liabilities of JP¥463.0m due beyond that. Offsetting these obligations, it had cash of JP¥478.0m as well as receivables valued at JP¥722.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥787.0m.

Of course, Koukandekirukun has a market capitalization of JP¥6.91b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Koukandekirukun boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Koukandekirukun grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Koukandekirukun 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 company can only pay off debt with cold hard cash, not accounting profits. While Koukandekirukun 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. Over the last three years, Koukandekirukun recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although Koukandekirukun's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥5.00m. On top of that, it increased its EBIT by 12% in the last twelve months. So we don't have any problem with Koukandekirukun's use of debt. 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. For example, we've discovered 2 warning signs for Koukandekirukun (1 is significant!) that you should be aware of before investing here.

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.