Does HEPHAIST (TYO:6433) Have A Healthy Balance Sheet?

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 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 HEPHAIST Co., Ltd. (TYO:6433) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for HEPHAIST

What Is HEPHAIST's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 HEPHAIST had JP¥444.0m of debt, an increase on JP¥277.0m, over one year. However, it does have JP¥633.0m in cash offsetting this, leading to net cash of JP¥189.0m.

How Healthy Is HEPHAIST's Balance Sheet?

According to the last reported balance sheet, HEPHAIST had liabilities of JP¥642.0m due within 12 months, and liabilities of JP¥508.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥633.0m as well as receivables valued at JP¥594.0m due within 12 months. So it can boast JP¥77.0m more liquid assets than total liabilities.

This short term liquidity is a sign that HEPHAIST could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, HEPHAIST boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is HEPHAIST'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.

Over 12 months, HEPHAIST made a loss at the EBIT level, and saw its revenue drop to JP¥1.9b, which is a fall of 26%. That makes us nervous, to say the least.

So How Risky Is HEPHAIST?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that HEPHAIST had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥133m of cash and made a loss of JP¥434m. Given it only has net cash of JP¥189.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - HEPHAIST has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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. 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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