These 4 Measures Indicate That Daito KounLtd (TSE:9367) Is Using Debt Reasonably Well

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. We can see that Daito Koun Co.,Ltd. (TSE:9367) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Check out our latest analysis for Daito KounLtd

What Is Daito KounLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Daito KounLtd had JP¥2.14b of debt, an increase on JP¥1.65b, over one year. But on the other hand it also has JP¥3.84b in cash, leading to a JP¥1.71b net cash position.

A Look At Daito KounLtd's Liabilities

The latest balance sheet data shows that Daito KounLtd had liabilities of JP¥3.26b due within a year, and liabilities of JP¥2.31b falling due after that. On the other hand, it had cash of JP¥3.84b and JP¥2.40b worth of receivables due within a year. So it can boast JP¥673.0m more liquid assets than total liabilities.

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

It is just as well that Daito KounLtd's load is not too heavy, because its EBIT was down 38% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Daito KounLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Daito KounLtd 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, Daito KounLtd recorded free cash flow worth 79% 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 it is always sensible to investigate a company's debt, in this case Daito KounLtd has JP¥1.71b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥860m, being 79% of its EBIT. So is Daito KounLtd's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Daito KounLtd , and understanding them should be part of your investment process.

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.

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