Here's Why FreakOut Holdings (TSE:6094) Can Manage Its Debt Despite Losing Money

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that FreakOut Holdings, inc. (TSE:6094) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 FreakOut Holdings Carry?

As you can see below, FreakOut Holdings had JP¥14.4b of debt at December 2024, down from JP¥16.0b a year prior. However, it does have JP¥18.9b in cash offsetting this, leading to net cash of JP¥4.51b.

How Strong Is FreakOut Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FreakOut Holdings had liabilities of JP¥17.8b due within 12 months and liabilities of JP¥7.38b due beyond that. Offsetting these obligations, it had cash of JP¥18.9b as well as receivables valued at JP¥11.9b due within 12 months. So it actually has JP¥5.58b more liquid assets than total liabilities.

This luscious liquidity implies that FreakOut Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that FreakOut Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is FreakOut Holdings'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 .

View our latest analysis for FreakOut Holdings

In the last year FreakOut Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to JP¥52b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is FreakOut Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that FreakOut Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥3.3b of cash and made a loss of JP¥2.7b. Given it only has net cash of JP¥4.51b, the company may need to raise more capital if it doesn't reach break-even soon. FreakOut Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 FreakOut Holdings that you should be aware of before investing here.

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.