Is Kumagai GumiLtd (TSE:1861) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said: “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.” So it seems that smart people know that debt – that usually accompanied by bankruptcies – a very important factor when assessing the risk of a company. What is important is Kumagai Gumi Co., Ltd. (TSE:1861) carries debt. But the real question is whether this debt makes the company risky.

Why does debt pose risks?

Debt is a tool that helps companies grow. However, if a company is unable to repay its lenders, it is at their mercy. 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 painful) scenario involves having to raise new equity capital at a low price, resulting in permanent shareholder dilution. However, as a replacement for dilution, debt can be an extremely good tool for companies that need capital to invest in growth at high returns. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Kumagai GumiLtd

How much debt does Kumagai GumiLtd have?

The image below, which you can click on for more details, shows that Kumagai GumiLtd had debt of JP¥39.1 billion at the end of September 2024, a reduction of JP¥41.2 billion over one year. On the other hand, the company also has JP¥46.6b in cash, leading to net cash of JP¥7.50b.

How strong is Kumagai GumiLtd’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Kumagai GumiLtd had liabilities of JP¥202.6b due within 12 months and liabilities of JP¥45.6b due within 12 months. which were due beyond that. Offsetting these obligations, it had cash of JP¥46.6b as well as receivables valued at JP¥260.0b due within 12 months. So it has JP¥58.5 billion more liquid assets than in total Liabilities.

This excess liquidity suggests that Kumagai GumiLtd’s balance sheet could take a hit just as well as Homer Simpson’s head. From this perspective, lenders should feel as secure as the mistress of a black belt karate master. In short, Kumagai GumiLtd has net cash, so it’s fair to say that the company doesn’t have a heavy debt load!

However, the bad news is that Kumagai GumiLtd’s EBIT fell 19% over the last twelve months. We believe that this performance, if repeated frequently, could well spell trouble for the stock. When analyzing debt levels, the balance sheet is the obvious place to start. However, the company’s future profitability will ultimately determine whether Kumagai GumiLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

And finally, while the tax officer is happy about accounting profits, lenders only accept cold hard cash. Although Kumagai GumiLtd has net cash on the balance sheet, it is still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) to free cash flow to understand how quickly the company is building that cash (or eroded). Balance. Looking at the last three years, Kumagai GumiLtd actually experienced an outflow of funds overall. Debt is typically more expensive and is almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for improvement.

In summary

While we sympathize with investors who find debt worrisome, you should keep in mind that Kumagai GumiLtd has net cash of JP¥7.50b, as well as more liquid assets than liabilities. So we are not concerned about Kumagai GumiLtd’s use of debt. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – quite the opposite. Note that Kumagai GumiLtd is shown 1 warning sign in our investment analysis you should know that…

If you’re the kind of investor who prefers buying stocks without the burden of debt, then don’t hesitate to explore our exclusive list of net cash growth stocks today.

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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 positions in any stocks mentioned.