Is Finatext Holdings (TSE:4419) Using Too Much Debt?

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.' 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 should shareholders be worried about its use of debt?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Finatext Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Finatext Holdings had JP¥1.87b of debt, an increase on JP¥599.0m, over one year. But it also has JP¥6.67b in cash to offset that, meaning it has JP¥4.80b net cash.

How Strong Is Finatext Holdings' Balance Sheet?

According to the last reported balance sheet, Finatext Holdings had liabilities of JP¥6.79b due within 12 months, and liabilities of JP¥1.11b due beyond 12 months. Offsetting these obligations, it had cash of JP¥6.67b as well as receivables valued at JP¥4.32b due within 12 months. So it can boast JP¥3.09b more liquid assets than total liabilities.

This short term liquidity is a sign that Finatext Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Finatext Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Finatext Holdings

On top of that, Finatext Holdings grew its EBIT by 98% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last two years, Finatext Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Finatext Holdings has net cash of JP¥4.80b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 98% 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. Be aware that Finatext Holdings is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.