Koei Tecmo Holdings (TSE:3635) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, Koei Tecmo Holdings Co., Ltd. (TSE:3635) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Koei Tecmo Holdings

What Is Koei Tecmo Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Koei Tecmo Holdings had JP¥61.7b of debt, an increase on JP¥56.5b, over one year. But it also has JP¥72.6b in cash to offset that, meaning it has JP¥10.8b net cash.

A Look At Koei Tecmo Holdings' Liabilities

According to the last reported balance sheet, Koei Tecmo Holdings had liabilities of JP¥86.0b due within 12 months, and liabilities of JP¥1.22b due beyond 12 months. Offsetting these obligations, it had cash of JP¥72.6b as well as receivables valued at JP¥12.5b due within 12 months. So its liabilities total JP¥2.21b more than the combination of its cash and short-term receivables.

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 it's very unlikely that the JP¥503.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Koei Tecmo Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Koei Tecmo Holdings grew its EBIT at 20% over the last year, further increasing its ability to manage debt. 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 Koei Tecmo Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Koei Tecmo Holdings recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Koei Tecmo Holdings has JP¥10.8b in net cash. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in JP¥33b. So is Koei Tecmo Holdings's debt a risk? It doesn't seem so to us. Given Koei Tecmo Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.