These 4 Measures Indicate That Koei Tecmo Holdings (TSE:3635) Is Using Debt Safely

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Koei Tecmo Holdings Co., Ltd. (TSE:3635) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Koei Tecmo Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Koei Tecmo Holdings had JP¥35.0b of debt in September 2025, down from JP¥55.1b, one year before. But it also has JP¥77.6b in cash to offset that, meaning it has JP¥42.6b net cash.

How Healthy Is Koei Tecmo Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Koei Tecmo Holdings had liabilities of JP¥51.0b due within 12 months and liabilities of JP¥14.5b due beyond that. On the other hand, it had cash of JP¥77.6b and JP¥10.8b worth of receivables due within a year. So it can boast JP¥22.9b more liquid assets than total liabilities.

This surplus suggests that Koei Tecmo Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Koei Tecmo Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Koei Tecmo Holdings

And we also note warmly that Koei Tecmo Holdings grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Koei Tecmo Holdings's ability to maintain a healthy balance sheet going forward. 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. Koei Tecmo Holdings 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. During the last three years, Koei Tecmo Holdings produced sturdy free cash flow equating to 75% 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 Koei Tecmo Holdings has net cash of JP¥42.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in JP¥6.1b. So we don't think Koei Tecmo Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Koei Tecmo Holdings that you should be aware of.

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.