Here's Why Kuramoto (TSE:5216) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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 Kuramoto Co., Ltd. (TSE:5216) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kuramoto

What Is Kuramoto's Net Debt?

As you can see below, Kuramoto had JP¥522.0m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥639.0m in cash to offset that, meaning it has JP¥117.0m net cash.

How Strong Is Kuramoto's Balance Sheet?

According to the last reported balance sheet, Kuramoto had liabilities of JP¥682.0m due within 12 months, and liabilities of JP¥232.0m due beyond 12 months. Offsetting this, it had JP¥639.0m in cash and JP¥466.0m in receivables that were due within 12 months. So it can boast JP¥191.0m more liquid assets than total liabilities.

Having regard to Kuramoto's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥12.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Kuramoto boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Kuramoto grew its EBIT by 113% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kuramoto 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Kuramoto 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 two years, Kuramoto saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kuramoto has net cash of JP¥117.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 113% over the last year. So we don't have any problem with Kuramoto'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. We've identified 4 warning signs with Kuramoto (at least 3 which are concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.