These 4 Measures Indicate That Hoshizaki (TSE:6465) Is Using Debt Safely

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 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, Hoshizaki Corporation (TSE:6465) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Hoshizaki

How Much Debt Does Hoshizaki Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hoshizaki had JP¥5.73b of debt, an increase on none, over one year. However, it does have JP¥236.2b in cash offsetting this, leading to net cash of JP¥230.4b.

How Strong Is Hoshizaki's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hoshizaki had liabilities of JP¥121.2b due within 12 months and liabilities of JP¥30.1b due beyond that. Offsetting these obligations, it had cash of JP¥236.2b as well as receivables valued at JP¥72.3b due within 12 months. So it actually has JP¥157.1b more liquid assets than total liabilities.

This surplus suggests that Hoshizaki is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hoshizaki has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Hoshizaki has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. 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 Hoshizaki can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hoshizaki has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Hoshizaki recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 investigate a company's debt, in this case Hoshizaki has JP¥230.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 42% over the last year. So is Hoshizaki's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Hoshizaki's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com