Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Konaka Co.,Ltd. (TSE:7494) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for KonakaLtd
What Is KonakaLtd's Debt?
The image below, which you can click on for greater detail, shows that KonakaLtd had debt of JP¥18.0b at the end of March 2024, a reduction from JP¥20.4b over a year. On the flip side, it has JP¥6.27b in cash leading to net debt of about JP¥11.7b.
A Look At KonakaLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that KonakaLtd had liabilities of JP¥29.1b due within 12 months and liabilities of JP¥2.66b due beyond that. On the other hand, it had cash of JP¥6.27b and JP¥4.41b worth of receivables due within a year. So its liabilities total JP¥21.1b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the JP¥8.49b 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. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year KonakaLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Over the last twelve months KonakaLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥543m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through JP¥2.2b in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example KonakaLtd has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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About TSE:7494
Mediocre balance sheet second-rate dividend payer.
