Is Honma Golf (HKG:6858) 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 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. As with many other companies Honma Golf Limited (HKG:6858) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Honma Golf

What Is Honma Golf's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Honma Golf had JP¥8.62b of debt, an increase on JP¥5.60b, over one year. However, it does have JP¥11.2b in cash offsetting this, leading to net cash of JP¥2.58b.

How Healthy Is Honma Golf's Balance Sheet?

The latest balance sheet data shows that Honma Golf had liabilities of JP¥14.7b due within a year, and liabilities of JP¥2.07b falling due after that. Offsetting these obligations, it had cash of JP¥11.2b as well as receivables valued at JP¥5.44b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Honma Golf'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¥34.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Honma Golf 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 Honma Golf 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.

In the last year Honma Golf had a loss before interest and tax, and actually shrunk its revenue by 17%, to JP¥22b. We would much prefer see growth.

So How Risky Is Honma Golf?

Although Honma Golf had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥2.0b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Take risks, for example - Honma Golf has 3 warning signs we think 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. 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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