Is Katsuragawa Electric (TSE:6416) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Katsuragawa Electric Co., Ltd. (TSE:6416) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Katsuragawa Electric

How Much Debt Does Katsuragawa Electric Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Katsuragawa Electric had debt of JP¥500.0m, up from JP¥380.0m in one year. But it also has JP¥1.78b in cash to offset that, meaning it has JP¥1.28b net cash.

How Healthy Is Katsuragawa Electric's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Katsuragawa Electric had liabilities of JP¥1.51b due within 12 months and liabilities of JP¥998.0m due beyond that. On the other hand, it had cash of JP¥1.78b and JP¥697.0m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Katsuragawa Electric's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥1.60b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Katsuragawa Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Katsuragawa Electric turned things around in the last 12 months, delivering and EBIT of JP¥14m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Katsuragawa Electric will need earnings to service that debt. 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. Katsuragawa Electric 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, Katsuragawa Electric actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Katsuragawa Electric's liabilities, but we can be reassured by the fact it has has net cash of JP¥1.28b. And it impressed us with free cash flow of JP¥529m, being 3,779% of its EBIT. So is Katsuragawa Electric'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. Case in point: We've spotted 2 warning signs for Katsuragawa Electric you should be aware of.

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.

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