These 4 Measures Indicate That Kaizen Platform (TSE:4170) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Kaizen Platform, Inc. (TSE:4170) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kaizen Platform

How Much Debt Does Kaizen Platform Carry?

As you can see below, Kaizen Platform had JP¥559.0m of debt at June 2024, down from JP¥1.32b a year prior. However, its balance sheet shows it holds JP¥2.80b in cash, so it actually has JP¥2.25b net cash.

How Healthy Is Kaizen Platform's Balance Sheet?

According to the last reported balance sheet, Kaizen Platform had liabilities of JP¥919.0m due within 12 months, and liabilities of JP¥281.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥2.80b as well as receivables valued at JP¥643.0m due within 12 months. So it can boast JP¥2.25b more liquid assets than total liabilities.

This surplus liquidity suggests that Kaizen Platform's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Kaizen Platform has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Kaizen Platform made a loss at the EBIT level, last year, it was also good to see that it generated JP¥14m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Kaizen Platform's earnings that will influence how the balance sheet holds up in the future. 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. Kaizen Platform 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 year, Kaizen Platform actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kaizen Platform has net cash of JP¥2.25b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥201m, being 1,436% of its EBIT. So is Kaizen Platform'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Kaizen Platform has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.