Health Check: How Prudently Does NCXX Group (TSE:6634) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that NCXX Group Inc. (TSE:6634) does have debt on its balance sheet. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is NCXX Group's Debt?

The image below, which you can click on for greater detail, shows that at February 2025 NCXX Group had debt of JP¥365.0m, up from JP¥31.0m in one year. However, its balance sheet shows it holds JP¥1.63b in cash, so it actually has JP¥1.26b net cash.

How Healthy Is NCXX Group's Balance Sheet?

We can see from the most recent balance sheet that NCXX Group had liabilities of JP¥1.77b falling due within a year, and liabilities of JP¥211.0m due beyond that. On the other hand, it had cash of JP¥1.63b and JP¥396.0m worth of receivables due within a year. So it actually has JP¥41.0m more liquid assets than total liabilities.

This state of affairs indicates that NCXX Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥7.52b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, NCXX Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is NCXX Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for NCXX Group

In the last year NCXX Group wasn't profitable at an EBIT level, but managed to grow its revenue by 221%, to JP¥2.5b. That's virtually the hole-in-one of revenue growth!

So How Risky Is NCXX Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months NCXX Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥363m of cash and made a loss of JP¥252m. While this does make the company a bit risky, it's important to remember it has net cash of JP¥1.26b. That means it could keep spending at its current rate for more than two years. Importantly, NCXX Group's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with NCXX Group (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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.

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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.