Softmax (TSE:3671) 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.' 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. We note that Softmax Co., Ltd (TSE:3671) does have debt on its balance sheet. But is this debt a concern to shareholders?

Our free stock report includes 1 warning sign investors should be aware of before investing in Softmax. Read for free now.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Softmax Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Softmax had debt of JP¥1.41b, up from JP¥1.33b in one year. However, its balance sheet shows it holds JP¥3.45b in cash, so it actually has JP¥2.04b net cash.

A Look At Softmax's Liabilities

We can see from the most recent balance sheet that Softmax had liabilities of JP¥3.37b falling due within a year, and liabilities of JP¥644.0m due beyond that. Offsetting these obligations, it had cash of JP¥3.45b as well as receivables valued at JP¥1.34b due within 12 months. So it actually has JP¥777.0m more liquid assets than total liabilities.

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

View our latest analysis for Softmax

Also good is that Softmax grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Softmax 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Softmax 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 most recent three years, Softmax recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Softmax has net cash of JP¥2.04b, as well as more liquid assets than liabilities. And it also grew its EBIT by 14% over the last year. So we don't think Softmax's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Softmax that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.