Is Finatext Holdings (TSE:4419) 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.' 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. As with many other companies Finatext Holdings Ltd. (TSE:4419) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Finatext Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Finatext Holdings had JP¥1.60b of debt, an increase on JP¥666.0m, over one year. But it also has JP¥4.45b in cash to offset that, meaning it has JP¥2.86b net cash.

How Strong Is Finatext Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Finatext Holdings had liabilities of JP¥8.83b due within 12 months and liabilities of JP¥575.0m due beyond that. Offsetting these obligations, it had cash of JP¥4.45b as well as receivables valued at JP¥4.91b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Finatext Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥62.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Finatext Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Finatext Holdings

Better yet, Finatext Holdings grew its EBIT by 363% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Finatext Holdings'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Finatext Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Finatext Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Finatext Holdings's liabilities, but we can be reassured by the fact it has has net cash of JP¥2.86b. And it impressed us with its EBIT growth of 363% over the last year. So we are not troubled with Finatext Holdings's debt use. 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. We've identified 2 warning signs with Finatext Holdings , and understanding them should be part of your investment process.

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.