Does Koei Tecmo Holdings (TSE:3635) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Koei Tecmo Holdings Co., Ltd. (TSE:3635) does use debt in its business. But should shareholders be worried about its use of debt?

We check all companies for important risks. See what we found for Koei Tecmo Holdings in our free report.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Koei Tecmo Holdings's Debt?

The image below, which you can click on for greater detail, shows that Koei Tecmo Holdings had debt of JP¥9.00b at the end of December 2024, a reduction from JP¥61.7b over a year. But it also has JP¥35.9b in cash to offset that, meaning it has JP¥26.9b net cash.

A Look At Koei Tecmo Holdings' Liabilities

The latest balance sheet data shows that Koei Tecmo Holdings had liabilities of JP¥36.4b due within a year, and liabilities of JP¥6.29b falling due after that. Offsetting this, it had JP¥35.9b in cash and JP¥11.0b in receivables that were due within 12 months. So it can boast JP¥4.30b more liquid assets than total liabilities.

This state of affairs indicates that Koei Tecmo Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥718.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Koei Tecmo Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Koei Tecmo Holdings

In fact Koei Tecmo Holdings's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Koei Tecmo Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Koei Tecmo Holdings 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. Happily for any shareholders, Koei Tecmo Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Koei Tecmo Holdings has net cash of JP¥26.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥28b, being 101% of its EBIT. So we don't have any problem with Koei Tecmo Holdings's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Koei Tecmo Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.