These 4 Measures Indicate That Finatext Holdings (TSE:4419) Is Using Debt Reasonably Well

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Finatext Holdings Ltd. (TSE:4419) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Finatext Holdings

What Is Finatext Holdings's Net Debt?

As you can see below, at the end of March 2024, Finatext Holdings had JP¥666.0m of debt, up from JP¥37.0m a year ago. Click the image for more detail. But it also has JP¥4.77b in cash to offset that, meaning it has JP¥4.10b net cash.

How Strong Is Finatext Holdings' Balance Sheet?

The latest balance sheet data shows that Finatext Holdings had liabilities of JP¥10.9b due within a year, and liabilities of JP¥553.0m falling due after that. Offsetting this, it had JP¥4.77b in cash and JP¥1.89b in receivables that were due within 12 months. So its liabilities total JP¥4.80b more than the combination of its cash and short-term receivables.

Since publicly traded Finatext Holdings shares are worth a total of JP¥53.8b, it seems unlikely that this level of liabilities would be a major threat. 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, 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¥205m. 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, 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. Over the last year, Finatext Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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¥4.10b. So we don't have any problem with Finatext Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Finatext Holdings 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.

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