Here's Why KinjiroLtd (TSE:4013) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Kinjiro Co.,Ltd. (TSE:4013) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for KinjiroLtd

How Much Debt Does KinjiroLtd Carry?

The image below, which you can click on for greater detail, shows that KinjiroLtd had debt of JP¥2.48b at the end of December 2023, a reduction from JP¥2.80b over a year. But it also has JP¥4.47b in cash to offset that, meaning it has JP¥1.99b net cash.

A Look At KinjiroLtd's Liabilities

According to the last reported balance sheet, KinjiroLtd had liabilities of JP¥1.25b due within 12 months, and liabilities of JP¥2.54b due beyond 12 months. Offsetting this, it had JP¥4.47b in cash and JP¥701.0m in receivables that were due within 12 months. So it can boast JP¥1.38b more liquid assets than total liabilities.

This surplus suggests that KinjiroLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, KinjiroLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, KinjiroLtd grew its EBIT by 29% in the last year, and that should make it 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 KinjiroLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. KinjiroLtd 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 three years, KinjiroLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KinjiroLtd has net cash of JP¥1.99b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 29% over the last year. So we are not troubled with KinjiroLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with KinjiroLtd .

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.