Is PLAIDInc (TSE:4165) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, PLAID,Inc. (TSE:4165) does carry debt. But the more important question is: how much risk is that debt creating?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is PLAIDInc's Net Debt?

As you can see below, PLAIDInc had JP¥1.16b of debt at December 2024, down from JP¥1.32b a year prior. However, it does have JP¥4.46b in cash offsetting this, leading to net cash of JP¥3.30b.

How Strong Is PLAIDInc's Balance Sheet?

We can see from the most recent balance sheet that PLAIDInc had liabilities of JP¥3.02b falling due within a year, and liabilities of JP¥356.3m due beyond that. On the other hand, it had cash of JP¥4.46b and JP¥1.19b worth of receivables due within a year. So it can boast JP¥2.28b more liquid assets than total liabilities.

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

Check out our latest analysis for PLAIDInc

Although PLAIDInc made a loss at the EBIT level, last year, it was also good to see that it generated JP¥677m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is PLAIDInc's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PLAIDInc 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 last year, PLAIDInc actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that PLAIDInc has net cash of JP¥3.30b, as well as more liquid assets than liabilities. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in JP¥843m. So we don't think PLAIDInc's use of debt is risky. 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. For example PLAIDInc has 2 warning signs (and 1 which is significant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.