Is freee K.K (TSE:4478) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, freee K.K. (TSE:4478) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for freee K.K

How Much Debt Does freee K.K Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 freee K.K had JP¥5.20b of debt, an increase on none, over one year. But on the other hand it also has JP¥30.1b in cash, leading to a JP¥24.9b net cash position.

A Look At freee K.K's Liabilities

We can see from the most recent balance sheet that freee K.K had liabilities of JP¥21.2b falling due within a year, and liabilities of JP¥1.60b due beyond that. Offsetting this, it had JP¥30.1b in cash and JP¥2.38b in receivables that were due within 12 months. So it can boast JP¥9.63b more liquid assets than total liabilities.

This surplus suggests that freee K.K has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, freee K.K boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if freee K.K 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.

Over 12 months, freee K.K reported revenue of JP¥27b, which is a gain of 31%, 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 in the last year freee K.K had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥7.4b of cash and made a loss of JP¥7.7b. But the saving grace is the JP¥24.9b on the balance sheet. 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. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 instance, we've identified 1 warning sign for freee K.K that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.