Is Money Forward (TSE:3994) Using Debt In A Risky Way?

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.' 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 Money Forward, Inc. (TSE:3994) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Money Forward

What Is Money Forward's Net Debt?

As you can see below, at the end of November 2023, Money Forward had JP¥30.4b of debt, up from JP¥16.9b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥38.9b in cash, so it actually has JP¥8.48b net cash.

How Healthy Is Money Forward's Balance Sheet?

According to the last reported balance sheet, Money Forward had liabilities of JP¥30.8b due within 12 months, and liabilities of JP¥22.8b due beyond 12 months. On the other hand, it had cash of JP¥38.9b and JP¥13.5b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.29b.

Having regard to Money Forward's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥365.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Money Forward also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Money Forward can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Money Forward wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to JP¥30b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Money Forward?

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 Money Forward had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥2.9b of cash and made a loss of JP¥6.3b. While this does make the company a bit risky, it's important to remember it has net cash of JP¥8.48b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Money Forward may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 1 warning sign for Money Forward you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.