Is Sourcenext (TSE:4344) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sourcenext Corporation (TSE:4344) does have debt on its balance sheet. But is this debt a concern to shareholders?

We've discovered 2 warning signs about Sourcenext. View them for free.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Sourcenext's Debt?

The image below, which you can click on for greater detail, shows that Sourcenext had debt of JP¥5.53b at the end of December 2024, a reduction from JP¥6.86b over a year. But it also has JP¥6.23b in cash to offset that, meaning it has JP¥703.0m net cash.

How Healthy Is Sourcenext's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sourcenext had liabilities of JP¥6.58b due within 12 months and liabilities of JP¥1.74b due beyond that. Offsetting these obligations, it had cash of JP¥6.23b as well as receivables valued at JP¥1.49b due within 12 months. So it has liabilities totalling JP¥604.0m more than its cash and near-term receivables, combined.

Of course, Sourcenext has a market capitalization of JP¥23.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sourcenext boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sourcenext will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Sourcenext

In the last year Sourcenext wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to JP¥12b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sourcenext?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sourcenext had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥2.0b of cash and made a loss of JP¥2.4b. But the saving grace is the JP¥703.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Sourcenext has 2 warning signs we think 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.

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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.