Is ExaWizards (TSE:4259) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, ExaWizards Inc. (TSE:4259) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

See our latest analysis for ExaWizards

How Much Debt Does ExaWizards Carry?

As you can see below, at the end of June 2024, ExaWizards had JP¥2.78b of debt, up from JP¥1.40b a year ago. Click the image for more detail. But it also has JP¥3.65b in cash to offset that, meaning it has JP¥872.0m net cash.

A Look At ExaWizards' Liabilities

According to the last reported balance sheet, ExaWizards had liabilities of JP¥1.75b due within 12 months, and liabilities of JP¥3.07b due beyond 12 months. On the other hand, it had cash of JP¥3.65b and JP¥1.27b worth of receivables due within a year. So it can boast JP¥99.0m more liquid assets than 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¥32.9b 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, ExaWizards reported revenue of JP¥9.2b, which is a gain of 61%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is ExaWizards?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ExaWizards had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥1.1b and booked a JP¥513m accounting loss. But the saving grace is the JP¥872.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, ExaWizards may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - ExaWizards has 1 warning sign we think you should be aware of.

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.