Here's Why Round One (TSE:4680) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Round One Corporation (TSE:4680) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Round One's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 Round One had debt of JP¥40.7b, up from JP¥22.2b in one year. However, it does have JP¥51.2b in cash offsetting this, leading to net cash of JP¥10.5b.

How Healthy Is Round One's Balance Sheet?

We can see from the most recent balance sheet that Round One had liabilities of JP¥67.5b falling due within a year, and liabilities of JP¥125.5b due beyond that. Offsetting these obligations, it had cash of JP¥51.2b as well as receivables valued at JP¥3.19b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥138.7b.

While this might seem like a lot, it is not so bad since Round One has a market capitalization of JP¥408.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Round One boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Round One

And we also note warmly that Round One grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Round One's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Round One has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Round One actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Round One's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥10.5b. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in JP¥42b. So is Round One's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Round One you should know about.

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.