Here's Why CyberAgent (TSE:4751) Can Manage Its Debt Responsibly

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 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. Importantly, CyberAgent, Inc. (TSE:4751) does carry debt. But the more important question is: how much risk is that debt creating?

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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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is CyberAgent's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 CyberAgent had debt of JP¥113.6b, up from JP¥106.4b in one year. However, its balance sheet shows it holds JP¥225.1b in cash, so it actually has JP¥111.6b net cash.

How Strong Is CyberAgent's Balance Sheet?

We can see from the most recent balance sheet that CyberAgent had liabilities of JP¥173.2b falling due within a year, and liabilities of JP¥99.8b due beyond that. On the other hand, it had cash of JP¥225.1b and JP¥93.2b worth of receivables due within a year. So it actually has JP¥45.3b more liquid assets than total liabilities.

This short term liquidity is a sign that CyberAgent could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CyberAgent has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for CyberAgent

In addition to that, we're happy to report that CyberAgent has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 CyberAgent'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 CyberAgent 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. In the last three years, CyberAgent's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CyberAgent has net cash of JP¥111.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 35% over the last year. So we don't think CyberAgent's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in CyberAgent, you may well want to click here to check an interactive graph of its earnings per share history .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.