These 4 Measures Indicate That Monogatari (TSE:3097) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, The Monogatari Corporation (TSE:3097) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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 Monogatari

What Is Monogatari's Net Debt?

The image below, which you can click on for greater detail, shows that Monogatari had debt of JP¥8.53b at the end of December 2024, a reduction from JP¥11.9b over a year. However, its balance sheet shows it holds JP¥11.2b in cash, so it actually has JP¥2.63b net cash.

A Look At Monogatari's Liabilities

Zooming in on the latest balance sheet data, we can see that Monogatari had liabilities of JP¥17.8b due within 12 months and liabilities of JP¥9.18b due beyond that. On the other hand, it had cash of JP¥11.2b and JP¥5.34b worth of receivables due within a year. So its liabilities total JP¥10.4b more than the combination of its cash and short-term receivables.

Since publicly traded Monogatari shares are worth a total of JP¥133.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Monogatari boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Monogatari has increased its EBIT by 4.5% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Monogatari can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Monogatari 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, Monogatari reported free cash flow worth 19% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about Monogatari's liabilities, but we can be reassured by the fact it has has net cash of JP¥2.63b. And it also grew its EBIT by 4.5% over the last year. So we don't have any problem with Monogatari's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Monogatari's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.