freee K.K (TSE:4478) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, freee K.K. (TSE:4478) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for freee K.K

What Is freee K.K's Debt?

As you can see below, at the end of December 2023, freee K.K had JP¥3.25b of debt, up from JP¥750.0m a year ago. Click the image for more detail. However, it does have JP¥30.9b in cash offsetting this, leading to net cash of JP¥27.6b.

A Look At freee K.K's Liabilities

The latest balance sheet data shows that freee K.K had liabilities of JP¥16.9b due within a year, and liabilities of JP¥1.63b falling due after that. On the other hand, it had cash of JP¥30.9b and JP¥2.31b worth of receivables due within a year. So it actually has JP¥14.6b more liquid assets than total liabilities.

This short term liquidity is a sign that freee K.K could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, freee K.K 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 ultimately the future profitability of the business will decide if freee K.K can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, freee K.K reported revenue of JP¥22b, which is a gain of 37%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is freee K.K?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that freee K.K had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥9.3b and booked a JP¥14b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥27.6b. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, freee K.K may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for freee K.K that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.