Does Horiifoodservice (TSE:3077) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Horiifoodservice Co., Ltd. (TSE:3077) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Horiifoodservice

How Much Debt Does Horiifoodservice Carry?

As you can see below, Horiifoodservice had JP¥1.50b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥1.47b in cash offsetting this, leading to net debt of about JP¥28.0m.

How Healthy Is Horiifoodservice's Balance Sheet?

We can see from the most recent balance sheet that Horiifoodservice had liabilities of JP¥2.08b falling due within a year, and liabilities of JP¥331.0m due beyond that. Offsetting these obligations, it had cash of JP¥1.47b as well as receivables valued at JP¥147.0m due within 12 months. So its liabilities total JP¥793.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Horiifoodservice is worth JP¥2.01b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, Horiifoodservice has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Horiifoodservice will need earnings to service that debt. 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.

Over 12 months, Horiifoodservice reported revenue of JP¥4.6b, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Horiifoodservice managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost JP¥35m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥143m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Horiifoodservice (of which 2 are a bit concerning!) you should know about.

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.