These 4 Measures Indicate That Konami Group (TSE:9766) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Konami Group Corporation (TSE:9766) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Konami Group

What Is Konami Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Konami Group had JP¥59.9b in debt in March 2024; about the same as the year before. However, it does have JP¥273.7b in cash offsetting this, leading to net cash of JP¥213.9b.

A Look At Konami Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Konami Group had liabilities of JP¥85.9b due within 12 months and liabilities of JP¥92.5b due beyond that. Offsetting these obligations, it had cash of JP¥273.7b as well as receivables valued at JP¥44.5b due within 12 months. So it actually has JP¥139.8b more liquid assets than total liabilities.

This surplus suggests that Konami Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Konami Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Konami Group has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. 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 Konami Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Konami Group 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. During the last three years, Konami Group produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Konami Group has net cash of JP¥213.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 91% over the last year. So is Konami Group's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Konami Group's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.