These 4 Measures Indicate That Rakus (TSE:3923) Is Using Debt Safely

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 Rakus Co., Ltd. (TSE:3923) makes use of debt. But should shareholders be worried about its use of debt?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Rakus

How Much Debt Does Rakus Carry?

The image below, which you can click on for greater detail, shows that Rakus had debt of JP¥404.0m at the end of December 2024, a reduction from JP¥1.16b over a year. However, its balance sheet shows it holds JP¥8.17b in cash, so it actually has JP¥7.76b net cash.

How Strong Is Rakus' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rakus had liabilities of JP¥7.33b due within 12 months and liabilities of JP¥263.0m due beyond that. On the other hand, it had cash of JP¥8.17b and JP¥6.66b worth of receivables due within a year. So it actually has JP¥7.23b more liquid assets than total liabilities.

This surplus suggests that Rakus has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Rakus boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Rakus grew its EBIT by 131% over twelve months. 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 ultimately the future profitability of the business will decide if Rakus can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Rakus 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, Rakus produced sturdy free cash flow equating to 70% 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 Rakus has JP¥7.76b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 131% over the last year. So is Rakus's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Rakus, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.