These 4 Measures Indicate That Kohoku KogyoLTD (TSE:6524) 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.' 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. We note that Kohoku Kogyo CO.,LTD. (TSE:6524) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kohoku KogyoLTD

What Is Kohoku KogyoLTD's Net Debt?

As you can see below, Kohoku KogyoLTD had JP¥499.0m of debt at June 2024, down from JP¥1.37b a year prior. But it also has JP¥11.0b in cash to offset that, meaning it has JP¥10.5b net cash.

How Strong Is Kohoku KogyoLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kohoku KogyoLTD had liabilities of JP¥3.16b due within 12 months and liabilities of JP¥2.41b due beyond that. On the other hand, it had cash of JP¥11.0b and JP¥4.62b worth of receivables due within a year. So it can boast JP¥10.1b more liquid assets than total liabilities.

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

On the other hand, Kohoku KogyoLTD's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kohoku KogyoLTD 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Kohoku KogyoLTD has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Kohoku KogyoLTD recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kohoku KogyoLTD has net cash of JP¥10.5b, as well as more liquid assets than liabilities. So we are not troubled with Kohoku KogyoLTD's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Kohoku KogyoLTD that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.