Nihon Knowledge CoLtd (TSE:5252) Has A Somewhat Strained Balance Sheet
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Nihon Knowledge Co,Ltd. (TSE:5252) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Nihon Knowledge CoLtd Carry?
As you can see below, at the end of September 2025, Nihon Knowledge CoLtd had JP¥429.0m of debt, up from JP¥399.0m a year ago. Click the image for more detail. But it also has JP¥757.0m in cash to offset that, meaning it has JP¥328.0m net cash.
How Healthy Is Nihon Knowledge CoLtd's Balance Sheet?
According to the last reported balance sheet, Nihon Knowledge CoLtd had liabilities of JP¥684.0m due within 12 months, and liabilities of JP¥343.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥757.0m as well as receivables valued at JP¥568.0m due within 12 months. So it can boast JP¥298.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Nihon Knowledge CoLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nihon Knowledge CoLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Check out our latest analysis for Nihon Knowledge CoLtd
It is just as well that Nihon Knowledge CoLtd's load is not too heavy, because its EBIT was down 29% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Nihon Knowledge CoLtd 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. Nihon Knowledge CoLtd 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, Nihon Knowledge CoLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Nihon Knowledge CoLtd has net cash of JP¥328.0m, as well as more liquid assets than liabilities. So while Nihon Knowledge CoLtd does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Nihon Knowledge CoLtd has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.