HKS (TYO:7219) Has A Rock Solid Balance Sheet

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.' 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 HKS Co., Ltd. (TYO:7219) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for HKS

What Is HKS's Net Debt?

The image below, which you can click on for greater detail, shows that HKS had debt of JP¥1.39b at the end of February 2021, a reduction from JP¥1.61b over a year. But it also has JP¥2.91b in cash to offset that, meaning it has JP¥1.52b net cash.

How Strong Is HKS' Balance Sheet?

We can see from the most recent balance sheet that HKS had liabilities of JP¥2.43b falling due within a year, and liabilities of JP¥1.00b due beyond that. Offsetting this, it had JP¥2.91b in cash and JP¥1.22b in receivables that were due within 12 months. So it can boast JP¥698.0m more liquid assets than total liabilities.

It's good to see that HKS has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that HKS has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, HKS grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is HKS's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. HKS may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, HKS actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that HKS has net cash of JP¥1.52b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥775m, being 164% of its EBIT. When it comes to HKS's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example, we've discovered 3 warning signs for HKS (1 is a bit unpleasant!) that you should be aware of before investing here.

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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