Core Concept Technologies (TSE:4371) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Core Concept Technologies Inc. (TSE:4371) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Core Concept Technologies

What Is Core Concept Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Core Concept Technologies had debt of JP¥870.0m, up from JP¥265.0m in one year. However, it does have JP¥2.01b in cash offsetting this, leading to net cash of JP¥1.14b.

How Strong Is Core Concept Technologies' Balance Sheet?

According to the last reported balance sheet, Core Concept Technologies had liabilities of JP¥3.41b due within 12 months, and liabilities of JP¥290.0m due beyond 12 months. On the other hand, it had cash of JP¥2.01b and JP¥3.17b worth of receivables due within a year. So it can boast JP¥1.48b more liquid assets than total liabilities.

This short term liquidity is a sign that Core Concept Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Core Concept Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Core Concept Technologies grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Core Concept Technologies'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Core Concept Technologies 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. Over the most recent three years, Core Concept Technologies recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Core Concept Technologies has JP¥1.14b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 53% over the last year. So is Core Concept Technologies's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Core Concept Technologies , and understanding them should be part of your investment process.

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.