Is kaihanLtd (TSE:3133) Using Too Much Debt?

David Iben put it best when he said, “Volatility is not a risk we care about. We care about avoiding permanent loss of capital.” When you think about how risky a particular stock is It may be obvious that you need to consider debt, because too much debt can ruin a business. As with many other companies Kaihan Co., Ltd. (TSE:3133) uses debt. But is this debt a problem for shareholders?

What risk does debt bring with it?

Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either through free cash flow or by raising capital at an attractive price. A key component of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is where a company must dilute shareholders at a cheap share price just to get debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for kaihanLtd

How much debt does kaihanLtd have?

As you can see below, kaihanLtd had debt of JP¥1.94 billion at the end of September 2024, an increase from JP¥1.62 billion a year ago. Click on the image for more details. On the other hand, the company has cash of JP¥507.0m leading to net debt of about JP¥1.43b.

How healthy is kaihanLtd’s balance sheet?

The latest balance sheet data shows that kaihanLtd had liabilities of JP¥1.46b within a year, and liabilities of JP¥1.35b falling due after that. Offsetting this, it had JP¥507.0m in cash and JP¥173.0m in receivables that were due within 12 months. So it has liabilities totaling JP¥2.13b more than its cash and short-term receivables combined.

Given kaihanLtd’s market capitalization of JP¥38.6b, it’s hard to believe that these liabilities pose much of a threat. But there are enough liabilities that we would definitely recommend that shareholders keep an eye on the balance sheet in the future. When analyzing debt levels, the balance sheet is the obvious place to start. But it is kaihanLtd’s earnings that will influence how the balance sheet develops in the future. So if you’re interested in discovering more about the company’s earnings, it might be worth checking out this graph of its long-term earnings trend.

Over 12 months, kaihanLtd reported sales of JP¥2.6 billion, up 7.3%, although it did not report earnings before interest and taxes. This growth rate is a bit slow for our taste, but it takes all species to create a world.

Precautionary measure

Importantly, kaihanLtd recorded earnings before interest and taxes (EBIT) last year. In fact, the company lost JP¥520 million at the EBIT level. If we look at this and remember the liabilities on the balance sheet relative to its cash, it seems unwise to us for the company to have debt. We therefore consider the balance sheet to be somewhat strained, although not irreparable. However, it doesn’t help that the company burned JP¥810m in cash last year. To be honest, we think it’s risky. There is no doubt that the balance sheet is where we learn the most about debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we discovered it 3 warning signs for kaihanLtd (1 doesn’t work well for us!), which is something you should be aware of before investing here.

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 immediately.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.