Finatext Holdings (TSE:4419) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Finatext Holdings Ltd. (TSE:4419) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Finatext Holdings

What Is Finatext Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Finatext Holdings had debt of JP¥1.13b, up from JP¥733.0m in one year. But it also has JP¥5.45b in cash to offset that, meaning it has JP¥4.32b net cash.

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How Healthy Is Finatext Holdings' Balance Sheet?

We can see from the most recent balance sheet that Finatext Holdings had liabilities of JP¥7.37b falling due within a year, and liabilities of JP¥713.0m due beyond that. Offsetting this, it had JP¥5.45b in cash and JP¥4.02b in receivables that were due within 12 months. So it actually has JP¥1.40b more liquid assets than total liabilities.

This surplus suggests that Finatext Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Finatext Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Finatext Holdings turned things around in the last 12 months, delivering and EBIT of JP¥669m. 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 Finatext Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Finatext Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Finatext Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Finatext Holdings has JP¥4.32b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 256% of that EBIT to free cash flow, bringing in JP¥1.7b. So we don't think Finatext Holdings's use of debt is risky. 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 example - Finatext Holdings has 1 warning sign we think 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.