Is Paycloud Holdings (TSE:4015) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Paycloud Holdings Inc. (TSE:4015) does carry debt. But the real question is whether this debt is making the company risky.

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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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Paycloud Holdings's Debt?

As you can see below, Paycloud Holdings had JP¥1.77b of debt, at August 2025, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥4.37b in cash to offset that, meaning it has JP¥2.60b net cash.

How Strong Is Paycloud Holdings' Balance Sheet?

The latest balance sheet data shows that Paycloud Holdings had liabilities of JP¥3.87b due within a year, and liabilities of JP¥1.01b falling due after that. Offsetting this, it had JP¥4.37b in cash and JP¥1.13b in receivables that were due within 12 months. So it can boast JP¥621.0m more liquid assets than total liabilities.

This surplus suggests that Paycloud Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Paycloud Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Paycloud Holdings

Better yet, Paycloud Holdings grew its EBIT by 117% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Paycloud Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Paycloud Holdings 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. Over the last three years, Paycloud Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Paycloud Holdings has JP¥2.60b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 175% of that EBIT to free cash flow, bringing in JP¥740m. So we don't think Paycloud Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Paycloud Holdings that you should be aware of before investing here.

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.