Is Kyowa Electronic Instruments (TSE:6853) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Kyowa Electronic Instruments Co., Ltd. (TSE:6853) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

View our latest analysis for Kyowa Electronic Instruments

What Is Kyowa Electronic Instruments's Debt?

You can click the graphic below for the historical numbers, but it shows that Kyowa Electronic Instruments had JP¥1.22b of debt in March 2024, down from JP¥1.64b, one year before. But it also has JP¥6.76b in cash to offset that, meaning it has JP¥5.54b net cash.

A Look At Kyowa Electronic Instruments' Liabilities

We can see from the most recent balance sheet that Kyowa Electronic Instruments had liabilities of JP¥4.89b falling due within a year, and liabilities of JP¥2.01b due beyond that. Offsetting these obligations, it had cash of JP¥6.76b as well as receivables valued at JP¥5.38b due within 12 months. So it actually has JP¥5.24b more liquid assets than total liabilities.

This surplus strongly suggests that Kyowa Electronic Instruments has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Kyowa Electronic Instruments has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Kyowa Electronic Instruments grew its EBIT by 103% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Kyowa Electronic Instruments'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, a company can only pay off debt with cold hard cash, not accounting profits. Kyowa Electronic Instruments 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. In the last three years, Kyowa Electronic Instruments created free cash flow amounting to 19% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kyowa Electronic Instruments has JP¥5.54b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 103% over the last year. So is Kyowa Electronic Instruments's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 3 warning signs we've spotted with Kyowa Electronic Instruments (including 1 which is significant) .

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.

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