Is Harmonic Drive Systems (TSE:6324) Using Debt Sensibly?

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.' 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 can see that Harmonic Drive Systems Inc. (TSE:6324) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Harmonic Drive Systems

How Much Debt Does Harmonic Drive Systems Carry?

As you can see below, Harmonic Drive Systems had JP¥17.8b of debt at June 2024, down from JP¥20.3b a year prior. But it also has JP¥20.3b in cash to offset that, meaning it has JP¥2.48b net cash.

How Strong Is Harmonic Drive Systems' Balance Sheet?

According to the last reported balance sheet, Harmonic Drive Systems had liabilities of JP¥13.0b due within 12 months, and liabilities of JP¥27.1b due beyond 12 months. Offsetting this, it had JP¥20.3b in cash and JP¥11.6b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥8.20b.

Given Harmonic Drive Systems has a market capitalization of JP¥314.8b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Harmonic Drive Systems 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 future earnings, more than anything, that will determine Harmonic Drive Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Harmonic Drive Systems had a loss before interest and tax, and actually shrunk its revenue by 24%, to JP¥54b. To be frank that doesn't bode well.

So How Risky Is Harmonic Drive Systems?

Although Harmonic Drive Systems had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥7.4b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Harmonic Drive Systems's profit, revenue, and operating cashflow have changed over the last few years.

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.