We Think Kaga ElectronicsLtd (TSE:8154) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Kaga Electronics Co.,Ltd. (TSE:8154) makes use of debt. But the real question is whether this debt is making the company risky.

We've discovered 1 warning sign about Kaga ElectronicsLtd. View them for free.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Kaga ElectronicsLtd's Debt?

As you can see below, Kaga ElectronicsLtd had JP¥31.2b of debt at December 2024, down from JP¥40.8b a year prior. But it also has JP¥72.7b in cash to offset that, meaning it has JP¥41.5b net cash.

How Healthy Is Kaga ElectronicsLtd's Balance Sheet?

The latest balance sheet data shows that Kaga ElectronicsLtd had liabilities of JP¥121.7b due within a year, and liabilities of JP¥22.8b falling due after that. On the other hand, it had cash of JP¥72.7b and JP¥111.5b worth of receivables due within a year. So it actually has JP¥39.7b more liquid assets than total liabilities.

It's good to see that Kaga ElectronicsLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Kaga ElectronicsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Kaga ElectronicsLtd

But the bad news is that Kaga ElectronicsLtd has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Kaga ElectronicsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kaga ElectronicsLtd 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. Over the last three years, Kaga ElectronicsLtd recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kaga ElectronicsLtd has JP¥41.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥28b, being 84% of its EBIT. So we don't think Kaga ElectronicsLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Kaga ElectronicsLtd has 1 warning sign we think 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.