Kushim (TSE:2345) Has Debt But No Earnings; Should You Worry?

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. Importantly, Kushim, Inc. (TSE:2345) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kushim

What Is Kushim's Net Debt?

The image below, which you can click on for greater detail, shows that at July 2024 Kushim had debt of JP¥1.37b, up from JP¥264.0m in one year. But on the other hand it also has JP¥9.80b in cash, leading to a JP¥8.43b net cash position.

How Healthy Is Kushim's Balance Sheet?

We can see from the most recent balance sheet that Kushim had liabilities of JP¥100.6b falling due within a year, and liabilities of JP¥1.67b due beyond that. On the other hand, it had cash of JP¥9.80b and JP¥461.0m worth of receivables due within a year. So it has liabilities totalling JP¥92.0b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥7.85b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Kushim would probably need a major re-capitalization if its creditors were to demand repayment. Kushim boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kushim 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.

Over 12 months, Kushim reported revenue of JP¥1.1b, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Kushim?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Kushim had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥253m of cash and made a loss of JP¥3.4b. While this does make the company a bit risky, it's important to remember it has net cash of JP¥8.43b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Kushim may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Kushim (including 2 which are potentially serious) .

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.

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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.