Is ExaWizards (TSE:4259) 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 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 ExaWizards Inc. (TSE:4259) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is ExaWizards's Net Debt?

As you can see below, ExaWizards had JP¥2.63b of debt at December 2024, down from JP¥2.93b a year prior. But it also has JP¥3.02b in cash to offset that, meaning it has JP¥395.0m net cash.

A Look At ExaWizards' Liabilities

We can see from the most recent balance sheet that ExaWizards had liabilities of JP¥1.75b falling due within a year, and liabilities of JP¥2.90b due beyond that. On the other hand, it had cash of JP¥3.02b and JP¥1.65b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that ExaWizards' 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¥21.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that ExaWizards has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ExaWizards can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for ExaWizards

Over 12 months, ExaWizards reported revenue of JP¥9.8b, which is a gain of 34%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ExaWizards?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year ExaWizards had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of JP¥990m and booked a JP¥330m accounting loss. But the saving grace is the JP¥395.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. ExaWizards's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. 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 1 warning sign for ExaWizards you should know about.

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.