These 4 Measures Indicate That CYND (TSE:4256) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CYND Co., Ltd. (TSE:4256) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for CYND

How Much Debt Does CYND Carry?

As you can see below, CYND had JP¥1.37b of debt at March 2024, down from JP¥1.58b a year prior. However, it does have JP¥2.01b in cash offsetting this, leading to net cash of JP¥636.0m.

How Strong Is CYND's Balance Sheet?

According to the last reported balance sheet, CYND had liabilities of JP¥541.0m due within 12 months, and liabilities of JP¥1.20b due beyond 12 months. On the other hand, it had cash of JP¥2.01b and JP¥140.0m worth of receivables due within a year. So it actually has JP¥401.0m 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. Simply put, the fact that CYND has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact CYND's saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CYND 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 we empathize with investors who find debt concerning, you should keep in mind that CYND has net cash of JP¥636.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥348m, being 109% of its EBIT. So we are not troubled with CYND's debt use. 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. For instance, we've identified 4 warning signs for CYND that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.