These 4 Measures Indicate That CrowdWorks (TSE:3900) Is Using Debt Safely

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.' 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. We can see that CrowdWorks Inc. (TSE:3900) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does CrowdWorks Carry?

The image below, which you can click on for greater detail, shows that at December 2024 CrowdWorks had debt of JP¥5.49b, up from JP¥777.0m in one year. But it also has JP¥6.80b in cash to offset that, meaning it has JP¥1.31b net cash.

How Strong Is CrowdWorks' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CrowdWorks had liabilities of JP¥6.32b due within 12 months and liabilities of JP¥3.85b due beyond that. Offsetting these obligations, it had cash of JP¥6.80b as well as receivables valued at JP¥2.98b due within 12 months. So it has liabilities totalling JP¥394.5m more than its cash and near-term receivables, combined.

Since publicly traded CrowdWorks shares are worth a total of JP¥15.3b, 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, CrowdWorks boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for CrowdWorks

The good news is that CrowdWorks has increased its EBIT by 5.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CrowdWorks 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. While CrowdWorks 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. Happily for any shareholders, CrowdWorks actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that CrowdWorks has JP¥1.31b in net cash. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in JP¥1.7b. So is CrowdWorks's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with CrowdWorks , and understanding them should be part of your investment process.

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.