These 4 Measures Indicate That CyberAgent (TSE:4751) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that CyberAgent, Inc. (TSE:4751) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CyberAgent

What Is CyberAgent's Net Debt?

The chart below, which you can click on for greater detail, shows that CyberAgent had JP¥106.1b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds JP¥222.9b in cash, so it actually has JP¥116.8b net cash.

A Look At CyberAgent's Liabilities

Zooming in on the latest balance sheet data, we can see that CyberAgent had liabilities of JP¥156.3b due within 12 months and liabilities of JP¥95.4b due beyond that. Offsetting this, it had JP¥222.9b in cash and JP¥82.7b in receivables that were due within 12 months. So it actually has JP¥53.9b more liquid assets than total liabilities.

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

Another good sign is that CyberAgent has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. 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 CyberAgent 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 company can only pay off debt with cold hard cash, not accounting profits. 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 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case CyberAgent has JP¥116.8b in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So is CyberAgent's debt a risk? It doesn't seem so to us. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.