Is HEPHAIST (TYO:6433) Using Too Much Debt?

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 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. Importantly, HEPHAIST Co., Ltd. (TYO:6433) does carry debt. 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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HEPHAIST

What Is HEPHAIST's Net Debt?

The chart below, which you can click on for greater detail, shows that HEPHAIST had JP¥483.0m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds JP¥702.0m in cash, so it actually has JP¥219.0m net cash.

A Look At HEPHAIST's Liabilities

According to the last reported balance sheet, HEPHAIST had liabilities of JP¥863.0m due within 12 months, and liabilities of JP¥476.0m due beyond 12 months. On the other hand, it had cash of JP¥702.0m and JP¥706.0m worth of receivables due within a year. So it actually has JP¥69.0m more liquid assets than total liabilities.

This surplus suggests that HEPHAIST has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, HEPHAIST boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is HEPHAIST'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.

In the last year HEPHAIST had a loss before interest and tax, and actually shrunk its revenue by 18%, to JP¥2.0b. We would much prefer see growth.

So How Risky Is HEPHAIST?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year HEPHAIST had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of JP¥133m and booked a JP¥355m accounting loss. With only JP¥219.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 3 warning signs for HEPHAIST (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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