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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Hoshizaki Corporation (TSE:6465) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hoshizaki

What Is Hoshizaki's Net Debt?

As you can see below, at the end of September 2024, Hoshizaki had JP¥5.73b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥232.1b in cash, so it actually has JP¥226.4b net cash.

How Strong Is Hoshizaki's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hoshizaki had liabilities of JP¥125.6b due within 12 months and liabilities of JP¥34.3b due beyond that. Offsetting this, it had JP¥232.1b in cash and JP¥67.0b in receivables that were due within 12 months. So it actually has JP¥139.2b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Hoshizaki boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Hoshizaki has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Looking at the most recent three years, Hoshizaki recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hoshizaki has net cash of JP¥226.4b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So we don't think Hoshizaki's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Hoshizaki, you may well want to click here to check an interactive graph of its earnings per share history.

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.