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

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 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. We note that Harmonic Drive Systems Inc. (TSE:6324) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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.

View our latest analysis for Harmonic Drive Systems

What Is Harmonic Drive Systems's Debt?

As you can see below, Harmonic Drive Systems had JP¥18.5b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥19.1b in cash, so it actually has JP¥585.0m net cash.

A Look At Harmonic Drive Systems' Liabilities

The latest balance sheet data shows that Harmonic Drive Systems had liabilities of JP¥13.0b due within a year, and liabilities of JP¥25.3b falling due after that. Offsetting this, it had JP¥19.1b in cash and JP¥12.6b in receivables that were due within 12 months. So its liabilities total JP¥6.60b more than the combination of its cash and short-term receivables.

Having regard to Harmonic Drive Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥403.2b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Harmonic Drive Systems also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Harmonic Drive Systems can strengthen its balance sheet over time. 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 9.8%, to JP¥54b. That's not what we would hope to see.

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¥2.7b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Harmonic Drive Systems that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.