KRAFTON (KRX:259960) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that KRAFTON, Inc. (KRX:259960) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 KRAFTON

How Much Debt Does KRAFTON Carry?

The image below, which you can click on for greater detail, shows that at June 2024 KRAFTON had debt of ₩266.3b, up from ₩7.00b in one year. But it also has ₩3.41t in cash to offset that, meaning it has ₩3.15t net cash.

A Look At KRAFTON's Liabilities

The latest balance sheet data shows that KRAFTON had liabilities of ₩685.9b due within a year, and liabilities of ₩365.2b falling due after that. Offsetting this, it had ₩3.41t in cash and ₩959.7b in receivables that were due within 12 months. So it actually has ₩3.32t more liquid assets than total liabilities.

This excess liquidity suggests that KRAFTON is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, KRAFTON boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, KRAFTON grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine KRAFTON'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KRAFTON 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. During the last three years, KRAFTON produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KRAFTON has net cash of ₩3.15t, as well as more liquid assets than liabilities. And we liked the look of last year's 45% year-on-year EBIT growth. So we don't think KRAFTON's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in KRAFTON, you may well want to click here to check an interactive graph of its earnings per share history.

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.