Is Rakuten Group (TSE:4755) Using Debt In A Risky Way?

Warren Buffett famously said, '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. We can see that Rakuten Group, Inc. (TSE:4755) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Rakuten Group

What Is Rakuten Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Rakuten Group had JP¥5.56t of debt, an increase on JP¥4.81t, over one year. However, it does have JP¥5.89t in cash offsetting this, leading to net cash of JP¥323.1b.

How Healthy Is Rakuten Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rakuten Group had liabilities of JP¥433.1b due within 12 months and liabilities of JP¥23t due beyond that. On the other hand, it had cash of JP¥5.89t and JP¥7.73t worth of receivables due within a year. So its liabilities total JP¥10t more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the JP¥1.85t company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Rakuten Group would probably need a major re-capitalization if its creditors were to demand repayment. Given that Rakuten Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Rakuten Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Rakuten Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.0%, to JP¥2.2t. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Rakuten Group?

Although Rakuten Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥1.1t. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Rakuten Group's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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.