We Think Harmonic Drive Systems (TSE:6324) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Harmonic Drive Systems Inc. (TSE:6324) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Harmonic Drive Systems

What Is Harmonic Drive Systems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Harmonic Drive Systems had JP¥18.4b of debt in March 2024, down from JP¥22.9b, one year before. However, its balance sheet shows it holds JP¥20.4b in cash, so it actually has JP¥1.93b net cash.

How Strong Is Harmonic Drive Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Harmonic Drive Systems had liabilities of JP¥11.7b due within 12 months and liabilities of JP¥28.0b due beyond that. Offsetting this, it had JP¥20.4b in cash and JP¥11.7b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥7.66b.

Since publicly traded Harmonic Drive Systems shares are worth a total of JP¥379.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Harmonic Drive Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Harmonic Drive Systems's load is not too heavy, because its EBIT was down 99% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Harmonic Drive Systems 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. During the last three years, Harmonic Drive Systems produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Harmonic Drive Systems has JP¥1.93b in net cash. And it impressed us with free cash flow of JP¥7.4b, being 75% of its EBIT. So we are not troubled with Harmonic Drive Systems's debt use. 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. Be aware that Harmonic Drive Systems is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.