CAVE InteractiveLTD (TSE:3760) Has A Somewhat Strained Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that CAVE Interactive CO.,LTD. (TSE:3760) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CAVE InteractiveLTD

How Much Debt Does CAVE InteractiveLTD Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2024 CAVE InteractiveLTD had JP¥1.24b of debt, an increase on JP¥1.04b, over one year. But on the other hand it also has JP¥5.36b in cash, leading to a JP¥4.13b net cash position.

How Healthy Is CAVE InteractiveLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CAVE InteractiveLTD had liabilities of JP¥2.57b due within 12 months and liabilities of JP¥4.09b due beyond that. On the other hand, it had cash of JP¥5.36b and JP¥1.58b worth of receivables due within a year. So it actually has JP¥285.0m more liquid assets than total liabilities.

This surplus suggests that CAVE InteractiveLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CAVE InteractiveLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact CAVE InteractiveLTD's saving grace is its low debt levels, because its EBIT has tanked 33% 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. There's no doubt that we learn most about debt from the balance sheet. But it is CAVE InteractiveLTD's earnings that will influence how the balance sheet holds up in the future. 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. CAVE InteractiveLTD 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 two years, CAVE InteractiveLTD recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CAVE InteractiveLTD has net cash of JP¥4.13b, as well as more liquid assets than liabilities. So while CAVE InteractiveLTD does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with CAVE InteractiveLTD .

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.