These 4 Measures Indicate That IKKA Holdings (Cayman) (TWSE:2250) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, IKKA Holdings (Cayman) Limited (TWSE:2250) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for IKKA Holdings (Cayman)

What Is IKKA Holdings (Cayman)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2024 IKKA Holdings (Cayman) had debt of NT$654.4m, up from NT$619.1m in one year. However, it does have NT$1.35b in cash offsetting this, leading to net cash of NT$691.8m.

A Look At IKKA Holdings (Cayman)'s Liabilities

We can see from the most recent balance sheet that IKKA Holdings (Cayman) had liabilities of NT$1.17b falling due within a year, and liabilities of NT$712.8m due beyond that. On the other hand, it had cash of NT$1.35b and NT$907.8m worth of receivables due within a year. So it actually has NT$374.7m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that IKKA Holdings (Cayman) has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since IKKA Holdings (Cayman) 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, a company can only pay off debt with cold hard cash, not accounting profits. IKKA Holdings (Cayman) 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, IKKA Holdings (Cayman) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case IKKA Holdings (Cayman) has NT$691.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$376m, being 101% of its EBIT. So is IKKA Holdings (Cayman)'s debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - IKKA Holdings (Cayman) has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.