Here's Why LaKeel (TSE:4074) Can Manage Its Debt Responsibly

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.' 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. As with many other companies LaKeel, Inc. (TSE:4074) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for LaKeel

What Is LaKeel's Net Debt?

You can click the graphic below for the historical numbers, but it shows that LaKeel had JP¥1.11b of debt in December 2023, down from JP¥1.18b, one year before. But on the other hand it also has JP¥2.70b in cash, leading to a JP¥1.60b net cash position.

How Healthy Is LaKeel's Balance Sheet?

The latest balance sheet data shows that LaKeel had liabilities of JP¥2.11b due within a year, and liabilities of JP¥474.0m falling due after that. On the other hand, it had cash of JP¥2.70b and JP¥1.14b worth of receivables due within a year. So it actually has JP¥1.26b more liquid assets than total liabilities.

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

While LaKeel doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if LaKeel 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While LaKeel has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, LaKeel recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case LaKeel has JP¥1.60b in net cash and a decent-looking balance sheet. So we don't think LaKeel's use of debt is risky. 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 3 warning signs for LaKeel (of which 1 is a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.