Is CYND (TSE:4256) Using Too Much Debt?

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 more important question is: how much risk is that debt creating?

We've discovered 2 warning signs about CYND. View them for free.

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is CYND's Debt?

You can click the graphic below for the historical numbers, but it shows that CYND had JP¥1.21b of debt in December 2024, down from JP¥1.37b, one year before. But on the other hand it also has JP¥1.99b in cash, leading to a JP¥780.0m net cash position.

A Look At CYND's Liabilities

According to the last reported balance sheet, CYND had liabilities of JP¥576.0m due within 12 months, and liabilities of JP¥1.04b due beyond 12 months. Offsetting this, it had JP¥1.99b in cash and JP¥178.0m in receivables that were due within 12 months. So it can boast JP¥548.0m more liquid assets than total liabilities.

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

See our latest analysis for CYND

Also good is that CYND grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is CYND's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case CYND has JP¥780.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in JP¥388m. So is CYND's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for CYND you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.