These 4 Measures Indicate That JAKKS Pacific (NASDAQ:JAKK) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies JAKKS Pacific, Inc. (NASDAQ:JAKK) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for JAKKS Pacific

What Is JAKKS Pacific's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 JAKKS Pacific had US$5.00m of debt, an increase on none, over one year. But on the other hand it also has US$17.7m in cash, leading to a US$12.7m net cash position.

How Strong Is JAKKS Pacific's Balance Sheet?

We can see from the most recent balance sheet that JAKKS Pacific had liabilities of US$161.8m falling due within a year, and liabilities of US$20.6m due beyond that. On the other hand, it had cash of US$17.7m and US$156.7m worth of receivables due within a year. So its liabilities total US$7.98m more than the combination of its cash and short-term receivables.

Since publicly traded JAKKS Pacific shares are worth a total of US$274.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, JAKKS Pacific boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that JAKKS Pacific's load is not too heavy, because its EBIT was down 33% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JAKKS Pacific 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While JAKKS Pacific 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, JAKKS Pacific produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about JAKKS Pacific's liabilities, but we can be reassured by the fact it has has net cash of US$12.7m. And it impressed us with free cash flow of US$9.3m, being 75% of its EBIT. So we don't have any problem with JAKKS Pacific's use of debt. 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. Case in point: We've spotted 2 warning signs for JAKKS Pacific you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.