Is Modalis Therapeutics (TSE:4883) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Modalis Therapeutics Corporation (TSE:4883) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Modalis Therapeutics's Net Debt?

As you can see below, at the end of September 2025, Modalis Therapeutics had JP¥262.5m of debt, up from JP¥210.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥3.31b in cash, so it actually has JP¥3.05b net cash.

A Look At Modalis Therapeutics' Liabilities

According to the last reported balance sheet, Modalis Therapeutics had liabilities of JP¥675.8m due within 12 months, and liabilities of JP¥53.7m due beyond 12 months. On the other hand, it had cash of JP¥3.31b and JP¥37.0m worth of receivables due within a year. So it can boast JP¥2.62b more liquid assets than total liabilities.

This surplus strongly suggests that Modalis Therapeutics has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Modalis Therapeutics 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 you can't view debt in total isolation; since Modalis Therapeutics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for Modalis Therapeutics

Since Modalis Therapeutics doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Modalis Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Modalis Therapeutics 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¥1.4b and booked a JP¥2.1b accounting loss. But at least it has JP¥3.05b on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 4 warning signs for Modalis Therapeutics you should be aware of, and 2 of them are concerning.

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.