Is KRAFTON (KRX:259960) A Risky Investment?

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 KRAFTON, Inc. (KRX:259960) does use debt in its business. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is KRAFTON's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2025 KRAFTON had debt of ₩35.2b, up from ₩7.00b in one year. But on the other hand it also has ₩4.34t in cash, leading to a ₩4.31t net cash position.

A Look At KRAFTON's Liabilities

According to the last reported balance sheet, KRAFTON had liabilities of ₩825.1b due within 12 months, and liabilities of ₩328.0b due beyond 12 months. On the other hand, it had cash of ₩4.34t and ₩874.6b worth of receivables due within a year. So it can boast ₩4.06t more liquid assets than total liabilities.

This surplus suggests that KRAFTON is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, KRAFTON boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for KRAFTON

In addition to that, we're happy to report that KRAFTON has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if KRAFTON 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. KRAFTON may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, KRAFTON recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case KRAFTON has ₩4.31t in net cash and a decent-looking balance sheet. And we liked the look of last year's 67% year-on-year EBIT growth. The bottom line is that we do not find KRAFTON's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - KRAFTON has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.