We Think Datasection (TSE:3905) Has A Fair Chunk Of Debt

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.' 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. As with many other companies Datasection Inc. (TSE:3905) makes use of debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Datasection's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Datasection had JP¥1.37b of debt, an increase on JP¥1.24b, over one year. However, it also had JP¥526.0m in cash, and so its net debt is JP¥842.0m.

A Look At Datasection's Liabilities

Zooming in on the latest balance sheet data, we can see that Datasection had liabilities of JP¥1.88b due within 12 months and liabilities of JP¥319.0m due beyond that. Offsetting these obligations, it had cash of JP¥526.0m as well as receivables valued at JP¥718.0m due within 12 months. So it has liabilities totalling JP¥952.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that Datasection's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥60.0b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Datasection has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Datasection 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.

See our latest analysis for Datasection

In the last year Datasection wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to JP¥2.9b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Datasection still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥496m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥1.1b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. We've identified 4 warning signs with Datasection (at least 3 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.