These 4 Measures Indicate That Waqoo (TSE:4937) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Waqoo Inc. (TSE:4937) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Waqoo's Debt?

As you can see below, Waqoo had JP¥783.0m of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥1.24b in cash, leading to a JP¥454.0m net cash position.

A Look At Waqoo's Liabilities

The latest balance sheet data shows that Waqoo had liabilities of JP¥554.0m due within a year, and liabilities of JP¥440.0m falling due after that. Offsetting these obligations, it had cash of JP¥1.24b as well as receivables valued at JP¥173.0m due within 12 months. So it actually has JP¥416.0m more liquid assets than total liabilities.

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

Check out our latest analysis for Waqoo

It was also good to see that despite losing money on the EBIT line last year, Waqoo turned things around in the last 12 months, delivering and EBIT of JP¥87m. There's no doubt that we learn most about debt from the balance sheet. But it is Waqoo'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 company can only pay off debt with cold hard cash, not accounting profits. While Waqoo 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 year, Waqoo saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Waqoo has JP¥454.0m in net cash and a decent-looking balance sheet. So we are not troubled with Waqoo's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Waqoo (of which 1 shouldn't be ignored!) you should know about.

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.

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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.