Here's Why Hosoya Pyro-Engineering (TSE:4274) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Hosoya Pyro-Engineering Co., Ltd. (TSE:4274) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Hosoya Pyro-Engineering's Net Debt?

The chart below, which you can click on for greater detail, shows that Hosoya Pyro-Engineering had JP¥625.0m in debt in March 2025; about the same as the year before. However, its balance sheet shows it holds JP¥725.0m in cash, so it actually has JP¥100.0m net cash.

How Strong Is Hosoya Pyro-Engineering's Balance Sheet?

According to the last reported balance sheet, Hosoya Pyro-Engineering had liabilities of JP¥911.0m due within 12 months, and liabilities of JP¥375.0m due beyond 12 months. Offsetting this, it had JP¥725.0m in cash and JP¥601.0m in receivables that were due within 12 months. So it actually has JP¥40.0m more liquid assets than total liabilities.

Having regard to Hosoya Pyro-Engineering's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥4.47b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Hosoya Pyro-Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Hosoya Pyro-Engineering

In addition to that, we're happy to report that Hosoya Pyro-Engineering has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Hosoya Pyro-Engineering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hosoya Pyro-Engineering 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. Considering the last three years, Hosoya Pyro-Engineering actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hosoya Pyro-Engineering has JP¥100.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 49% year-on-year EBIT growth. So we are not troubled with Hosoya Pyro-Engineering's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hosoya Pyro-Engineering you should know about.

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.