Is KonakaLtd (TSE:7494) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Konaka Co.,Ltd. (TSE:7494) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for KonakaLtd

What Is KonakaLtd's Net Debt?

The image below, which you can click on for greater detail, shows that KonakaLtd had debt of JP¥17.7b at the end of June 2024, a reduction from JP¥20.2b over a year. However, it also had JP¥4.91b in cash, and so its net debt is JP¥12.8b.

A Look At KonakaLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that KonakaLtd had liabilities of JP¥18.1b due within 12 months and liabilities of JP¥11.9b due beyond that. On the other hand, it had cash of JP¥4.91b and JP¥3.23b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥21.9b.

This deficit casts a shadow over the JP¥8.25b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, KonakaLtd would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is KonakaLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, KonakaLtd made a loss at the EBIT level, and saw its revenue drop to JP¥63b, which is a fall of 3.0%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months KonakaLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable JP¥1.1b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through JP¥2.2b in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for KonakaLtd you should know about.

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.