Is Digital Garage (TSE:4819) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Digital Garage, Inc. (TSE:4819) does use debt in its business. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Digital Garage's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Digital Garage had JP¥61.6b of debt in March 2025, down from JP¥67.3b, one year before. However, because it has a cash reserve of JP¥56.4b, its net debt is less, at about JP¥5.28b.

A Look At Digital Garage's Liabilities

The latest balance sheet data shows that Digital Garage had liabilities of JP¥97.6b due within a year, and liabilities of JP¥51.1b falling due after that. Offsetting this, it had JP¥56.4b in cash and JP¥86.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥6.24b.

Of course, Digital Garage has a market capitalization of JP¥186.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Digital Garage's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

View our latest analysis for Digital Garage

Over 12 months, Digital Garage reported revenue of JP¥32b, which is a gain of 2.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Digital Garage produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥9.0b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of JP¥7.2b. In the meantime, we consider the stock very risky. 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.