Hi-Lex (TSE:7279) Could Easily Take On More Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Hi-Lex Corporation (TSE:7279) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hi-Lex

What Is Hi-Lex's Net Debt?

The chart below, which you can click on for greater detail, shows that Hi-Lex had JP¥12.3b in debt in July 2024; about the same as the year before. But it also has JP¥63.3b in cash to offset that, meaning it has JP¥51.0b net cash.

How Strong Is Hi-Lex's Balance Sheet?

The latest balance sheet data shows that Hi-Lex had liabilities of JP¥74.1b due within a year, and liabilities of JP¥16.8b falling due after that. Offsetting these obligations, it had cash of JP¥63.3b as well as receivables valued at JP¥50.1b due within 12 months. So it can boast JP¥22.6b more liquid assets than total liabilities.

This luscious liquidity implies that Hi-Lex's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Hi-Lex boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Hi-Lex made a loss at the EBIT level, last year, it was also good to see that it generated JP¥2.8b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Hi-Lex's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hi-Lex 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, Hi-Lex actually produced more free cash flow than EBIT over the last year. 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 it is always sensible to investigate a company's debt, in this case Hi-Lex has JP¥51.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥12b, being 409% of its EBIT. So is Hi-Lex's debt a risk? It doesn't seem so to us. 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 Hi-Lex is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.