We Think Rakus (TSE:3923) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Rakus Co., Ltd. (TSE:3923) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Rakus

What Is Rakus's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Rakus had JP¥1.16b of debt, an increase on JP¥37.0m, over one year. However, its balance sheet shows it holds JP¥5.36b in cash, so it actually has JP¥4.20b net cash.

A Look At Rakus' Liabilities

The latest balance sheet data shows that Rakus had liabilities of JP¥6.23b due within a year, and liabilities of JP¥754.0m falling due after that. On the other hand, it had cash of JP¥5.36b and JP¥5.42b worth of receivables due within a year. So it actually has JP¥3.79b more liquid assets than total liabilities.

This state of affairs indicates that Rakus' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥373.9b company is short on cash, but still worth keeping an eye on the balance sheet. 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 177% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rakus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Rakus's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Rakus has JP¥4.20b in net cash and a decent-looking balance sheet. And we liked the look of last year's 177% year-on-year EBIT growth. So is Rakus's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Rakus .

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.