Is ExaWizards (TSE:4259) Weighed On By Its Debt Load?

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. As with many other companies ExaWizards Inc. (TSE:4259) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. 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

What Is ExaWizards's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 ExaWizards had JP¥2.85b of debt, an increase on JP¥310.0m, over one year. However, its balance sheet shows it holds JP¥3.49b in cash, so it actually has JP¥639.0m net cash.

A Look At ExaWizards' Liabilities

The latest balance sheet data shows that ExaWizards had liabilities of JP¥1.81b due within a year, and liabilities of JP¥3.14b falling due after that. Offsetting this, it had JP¥3.49b in cash and JP¥1.85b in receivables that were due within 12 months. So it actually has JP¥391.0m 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¥31.4b 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ExaWizards's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year ExaWizards wasn't profitable at an EBIT level, but managed to grow its revenue by 50%, to JP¥8.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is ExaWizards?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months ExaWizards lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥1.1b and booked a JP¥610m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥639.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. For instance, we've identified 1 warning sign for ExaWizards that you should be aware of.

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.