These 4 Measures Indicate That KRAFTON (KRX:259960) Is Using Debt Safely

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.' 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. As with many other companies KRAFTON, Inc. (KRX:259960) makes use of debt. But should shareholders be worried about its use of debt?

Our free stock report includes 1 warning sign investors should be aware of before investing in KRAFTON. Read for free now.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is KRAFTON's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 KRAFTON had debt of ₩34.8b, up from ₩7.00b in one year. But it also has ₩3.88t in cash to offset that, meaning it has ₩3.84t net cash.

How Healthy Is KRAFTON's Balance Sheet?

We can see from the most recent balance sheet that KRAFTON had liabilities of ₩784.8b falling due within a year, and liabilities of ₩305.5b due beyond that. Offsetting these obligations, it had cash of ₩3.88t as well as receivables valued at ₩1.04t due within 12 months. So it can boast ₩3.83t 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. Simply put, the fact that KRAFTON has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for KRAFTON

On top of that, KRAFTON grew its EBIT by 54% 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 62% 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 ₩3.84t, as well as more liquid assets than liabilities. And we liked the look of last year's 54% year-on-year EBIT growth. So is KRAFTON's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for KRAFTON that you should be aware of.

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.