Is Kushim (TSE:2345) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Kushim, Inc. (TSE:2345) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kushim

What Is Kushim's Debt?

As you can see below, at the end of October 2023, Kushim had JP¥1.04b of debt, up from JP¥308.0m a year ago. Click the image for more detail. But on the other hand it also has JP¥7.75b in cash, leading to a JP¥6.71b net cash position.

How Strong Is Kushim's Balance Sheet?

The latest balance sheet data shows that Kushim had liabilities of JP¥56.4b due within a year, and liabilities of JP¥1.24b falling due after that. Offsetting this, it had JP¥7.75b in cash and JP¥224.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥49.7b.

This deficit casts a shadow over the JP¥4.21b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Kushim would probably need a major re-capitalization if its creditors were to demand repayment. Given that Kushim has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kushim's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Kushim had a loss before interest and tax, and actually shrunk its revenue by 76%, to JP¥394m. That makes us nervous, to say the least.

So How Risky Is Kushim?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Kushim had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥266m of cash and made a loss of JP¥1.7b. With only JP¥6.71b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Kushim (of which 1 makes us a bit uncomfortable!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.