Paycloud Holdings (TSE:4015) Has A Rock Solid Balance Sheet

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. We note that Paycloud Holdings Inc. (TSE:4015) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Paycloud Holdings

What Is Paycloud Holdings's Debt?

The image below, which you can click on for greater detail, shows that at August 2024 Paycloud Holdings had debt of JP¥1.84b, up from JP¥1.25b in one year. However, it does have JP¥3.23b in cash offsetting this, leading to net cash of JP¥1.39b.

How Healthy Is Paycloud Holdings' Balance Sheet?

We can see from the most recent balance sheet that Paycloud Holdings had liabilities of JP¥2.80b falling due within a year, and liabilities of JP¥1.24b due beyond that. Offsetting these obligations, it had cash of JP¥3.23b as well as receivables valued at JP¥1.09b due within 12 months. So it actually has JP¥271.0m 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.

Better yet, Paycloud Holdings grew its EBIT by 106% 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 it is Paycloud Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Paycloud 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. Over the last two years, Paycloud Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Paycloud Holdings has net cash of JP¥1.39b, as well as more liquid assets than liabilities. The cherry on top was that in converted 283% of that EBIT to free cash flow, bringing in JP¥990m. So is Paycloud Holdings'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. For instance, we've identified 4 warning signs for Paycloud Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.