We Think Kamigumi (TSE:9364) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Kamigumi Co., Ltd. (TSE:9364) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Kamigumi Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Kamigumi had JP¥30.5b of debt, an increase on JP¥20.0b, over one year. But it also has JP¥84.3b in cash to offset that, meaning it has JP¥53.8b net cash.

How Healthy Is Kamigumi's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kamigumi had liabilities of JP¥45.2b due within 12 months and liabilities of JP¥52.1b due beyond that. Offsetting this, it had JP¥84.3b in cash and JP¥53.5b in receivables that were due within 12 months. So it can boast JP¥40.5b more liquid assets than total liabilities.

This short term liquidity is a sign that Kamigumi could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kamigumi has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Kamigumi

The good news is that Kamigumi has increased its EBIT by 5.0% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kamigumi'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Kamigumi 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 last three years, Kamigumi recorded free cash flow worth a fulsome 94% 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 Kamigumi has JP¥53.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥34b, being 94% of its EBIT. So we don't think Kamigumi's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Kamigumi 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.