Is Digital Garage (TSE:4819) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Digital Garage, Inc. (TSE:4819) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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 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.

How Much Debt Does Digital Garage Carry?

You can click the graphic below for the historical numbers, but it shows that Digital Garage had JP¥62.7b of debt in December 2024, down from JP¥67.1b, one year before. However, its balance sheet shows it holds JP¥141.3b in cash, so it actually has JP¥78.7b net cash.

How Strong Is Digital Garage's Balance Sheet?

We can see from the most recent balance sheet that Digital Garage had liabilities of JP¥140.8b falling due within a year, and liabilities of JP¥35.9b due beyond that. Offsetting this, it had JP¥141.3b in cash and JP¥31.9b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Digital Garage's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥192.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Digital Garage boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Digital Garage can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for Digital Garage

Over 12 months, Digital Garage reported revenue of JP¥32b, which is a gain of 7.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Digital Garage?

While Digital Garage lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow JP¥33b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 Digital Garage'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.