Here's Why Hisaka Works (TSE:6247) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Hisaka Works, Ltd. (TSE:6247) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Hisaka Works's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Hisaka Works had debt of JP¥5.00b, up from none in one year. But on the other hand it also has JP¥11.3b in cash, leading to a JP¥6.27b net cash position.

How Strong Is Hisaka Works' Balance Sheet?

The latest balance sheet data shows that Hisaka Works had liabilities of JP¥14.2b due within a year, and liabilities of JP¥8.48b falling due after that. On the other hand, it had cash of JP¥11.3b and JP¥11.1b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Hisaka Works' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥23.6b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hisaka Works boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Hisaka Works

Better yet, Hisaka Works grew its EBIT by 125% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hisaka Works'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hisaka Works 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. Over the last three years, Hisaka Works saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hisaka Works has JP¥6.27b in net cash. And it impressed us with its EBIT growth of 125% over the last year. So we don't have any problem with Hisaka Works's use of debt. 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. Be aware that Hisaka Works is showing 2 warning signs in our investment analysis , you should know about...

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. 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.