Is Morimatsu International Holdings (HKG:2155) A Risky Investment?

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.' 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. We note that Morimatsu International Holdings Company Limited (HKG:2155) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Morimatsu International Holdings Carry?

The image below, which you can click on for greater detail, shows that Morimatsu International Holdings had debt of CN¥216.5m at the end of June 2025, a reduction from CN¥279.7m over a year. But it also has CN¥3.17b in cash to offset that, meaning it has CN¥2.96b net cash.

A Look At Morimatsu International Holdings' Liabilities

The latest balance sheet data shows that Morimatsu International Holdings had liabilities of CN¥3.95b due within a year, and liabilities of CN¥190.9m falling due after that. On the other hand, it had cash of CN¥3.17b and CN¥2.26b worth of receivables due within a year. So it actually has CN¥1.30b more liquid assets than total liabilities.

This surplus suggests that Morimatsu International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Morimatsu International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Morimatsu International Holdings

But the bad news is that Morimatsu International Holdings has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Morimatsu International Holdings'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Morimatsu International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Morimatsu International Holdings's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Morimatsu International Holdings has net cash of CN¥2.96b, as well as more liquid assets than liabilities. So we are not troubled with Morimatsu International Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Morimatsu International Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.