CYND (TSE:4256) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, CYND Co., Ltd. (TSE:4256) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CYND

How Much Debt Does CYND Carry?

The image below, which you can click on for greater detail, shows that CYND had debt of JP¥1.32b at the end of June 2024, a reduction from JP¥1.58b over a year. However, it does have JP¥2.02b in cash offsetting this, leading to net cash of JP¥698.0m.

A Look At CYND's Liabilities

According to the last reported balance sheet, CYND had liabilities of JP¥535.0m due within 12 months, and liabilities of JP¥1.15b due beyond 12 months. Offsetting this, it had JP¥2.02b in cash and JP¥151.0m in receivables that were due within 12 months. So it actually has JP¥481.0m more liquid assets than total liabilities.

This short term liquidity is a sign that CYND could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CYND boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that CYND's load is not too heavy, because its EBIT was down 35% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CYND's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. CYND 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. Happily for any shareholders, CYND actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case CYND has JP¥698.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥348m, being 117% of its EBIT. So we are not troubled with CYND's debt use. 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. Be aware that CYND is showing 4 warning signs in our investment analysis , you should know about...

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.