Is Laxus Technologies (TSE:288A) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Laxus Technologies Inc. (TSE:288A) does carry debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Laxus Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that Laxus Technologies had debt of JP¥1.30b at the end of March 2025, a reduction from JP¥2.45b over a year. However, its balance sheet shows it holds JP¥1.52b in cash, so it actually has JP¥226.5m net cash.

How Healthy Is Laxus Technologies' Balance Sheet?

According to the last reported balance sheet, Laxus Technologies had liabilities of JP¥772.5m due within 12 months, and liabilities of JP¥926.7m due beyond 12 months. On the other hand, it had cash of JP¥1.52b and JP¥311.3m worth of receivables due within a year. So it actually has JP¥134.2m more liquid assets than total liabilities.

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

View our latest analysis for Laxus Technologies

Also positive, Laxus Technologies grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Laxus Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Laxus Technologies 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. Looking at the most recent three years, Laxus Technologies recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Laxus Technologies has JP¥226.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 21% over the last year. So we don't think Laxus Technologies'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Laxus Technologies (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.