We Think Paycloud Holdings (TSE:4015) Can Manage Its Debt With Ease

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. As with many other companies Paycloud Holdings Inc. (TSE:4015) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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

See our latest analysis for Paycloud Holdings

What Is Paycloud Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of November 2024 Paycloud Holdings had JP¥1.96b of debt, an increase on JP¥1.51b, over one year. However, its balance sheet shows it holds JP¥3.10b in cash, so it actually has JP¥1.14b net cash.

How Strong Is Paycloud Holdings' Balance Sheet?

The latest balance sheet data shows that Paycloud Holdings had liabilities of JP¥2.91b due within a year, and liabilities of JP¥1.19b falling due after that. On the other hand, it had cash of JP¥3.10b and JP¥1.28b worth of receivables due within a year. So it can boast JP¥280.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Paycloud Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Paycloud Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Paycloud Holdings grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Paycloud Holdings actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Paycloud Holdings has net cash of JP¥1.14b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥990m, being 203% of its EBIT. So is Paycloud Holdings's debt a risk? It doesn't seem so to us. 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 - Paycloud Holdings has 3 warning signs we think 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.