Is HIRAYAMA HOLDINGSLtd (TSE:7781) 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 can see that HIRAYAMA HOLDINGS Co.,Ltd. (TSE:7781) does use debt in its business. But the real question is whether this debt is making the company risky.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does HIRAYAMA HOLDINGSLtd Carry?

As you can see below, at the end of December 2024, HIRAYAMA HOLDINGSLtd had JP¥1.44b of debt, up from JP¥729.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥6.31b in cash, so it actually has JP¥4.88b net cash.

How Healthy Is HIRAYAMA HOLDINGSLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HIRAYAMA HOLDINGSLtd had liabilities of JP¥5.13b due within 12 months and liabilities of JP¥2.73b due beyond that. Offsetting these obligations, it had cash of JP¥6.31b as well as receivables valued at JP¥3.92b due within 12 months. So it can boast JP¥2.38b more liquid assets than total liabilities.

This surplus strongly suggests that HIRAYAMA HOLDINGSLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, HIRAYAMA HOLDINGSLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for HIRAYAMA HOLDINGSLtd

Also positive, HIRAYAMA HOLDINGSLtd grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is HIRAYAMA HOLDINGSLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend .

Finally, a company can only pay off debt with cold hard cash, not accounting profits. HIRAYAMA HOLDINGSLtd 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, HIRAYAMA HOLDINGSLtd produced sturdy free cash flow equating to 78% 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 investigate a company's debt, in this case HIRAYAMA HOLDINGSLtd has JP¥4.88b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.2b, being 78% of its EBIT. The bottom line is that we do not find HIRAYAMA HOLDINGSLtd's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - HIRAYAMA HOLDINGSLtd has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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.