Hoden Seimitsu Kako Kenkyusho (TSE:6469) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Hoden Seimitsu Kako Kenkyusho Co., Ltd. (TSE:6469) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Hoden Seimitsu Kako Kenkyusho Carry?

The image below, which you can click on for greater detail, shows that Hoden Seimitsu Kako Kenkyusho had debt of JP¥3.78b at the end of August 2025, a reduction from JP¥4.45b over a year. However, it also had JP¥2.58b in cash, and so its net debt is JP¥1.20b.

How Healthy Is Hoden Seimitsu Kako Kenkyusho's Balance Sheet?

According to the last reported balance sheet, Hoden Seimitsu Kako Kenkyusho had liabilities of JP¥4.80b due within 12 months, and liabilities of JP¥4.39b due beyond 12 months. Offsetting this, it had JP¥2.58b in cash and JP¥3.13b in receivables that were due within 12 months. So it has liabilities totalling JP¥3.47b more than its cash and near-term receivables, combined.

Since publicly traded Hoden Seimitsu Kako Kenkyusho shares are worth a total of JP¥20.8b, 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.

View our latest analysis for Hoden Seimitsu Kako Kenkyusho

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Hoden Seimitsu Kako Kenkyusho has a low net debt to EBITDA ratio of only 0.62. And its EBIT covers its interest expense a whopping 17.8 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Even more impressive was the fact that Hoden Seimitsu Kako Kenkyusho grew its EBIT by 164% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hoden Seimitsu Kako Kenkyusho's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Hoden Seimitsu Kako Kenkyusho recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

The good news is that Hoden Seimitsu Kako Kenkyusho's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Overall, we don't think Hoden Seimitsu Kako Kenkyusho is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Hoden Seimitsu Kako Kenkyusho you should be aware of.

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.