Is Artiza Networks (TSE:6778) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Artiza Networks, Inc. (TSE:6778) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Artiza Networks

How Much Debt Does Artiza Networks Carry?

As you can see below, Artiza Networks had JP¥1.55b of debt at April 2024, down from JP¥1.82b a year prior. However, its balance sheet shows it holds JP¥6.52b in cash, so it actually has JP¥4.97b net cash.

How Healthy Is Artiza Networks' Balance Sheet?

We can see from the most recent balance sheet that Artiza Networks had liabilities of JP¥1.58b falling due within a year, and liabilities of JP¥442.0m due beyond that. Offsetting these obligations, it had cash of JP¥6.52b as well as receivables valued at JP¥693.0m due within 12 months. So it actually has JP¥5.19b more liquid assets than total liabilities.

This luscious liquidity implies that Artiza Networks' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Artiza Networks 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 future earnings, more than anything, that will determine Artiza Networks'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.

In the last year Artiza Networks had a loss before interest and tax, and actually shrunk its revenue by 39%, to JP¥2.8b. To be frank that doesn't bode well.

So How Risky Is Artiza Networks?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Artiza Networks had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥102m of cash and made a loss of JP¥531m. With only JP¥4.97b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 instance, we've identified 2 warning signs for Artiza Networks (1 is significant) you should be aware of.

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.

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