Does H.U. Group Holdings (TSE:4544) Have A Healthy Balance Sheet?

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.' 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 H.U. Group Holdings, Inc. (TSE:4544) 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for H.U. Group Holdings

How Much Debt Does H.U. Group Holdings Carry?

As you can see below, at the end of March 2024, H.U. Group Holdings had JP¥70.1b of debt, up from JP¥63.7b a year ago. Click the image for more detail. However, it does have JP¥39.9b in cash offsetting this, leading to net debt of about JP¥30.2b.

How Strong Is H.U. Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that H.U. Group Holdings had liabilities of JP¥64.1b due within 12 months and liabilities of JP¥84.3b due beyond that. Offsetting this, it had JP¥39.9b in cash and JP¥46.9b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥61.5b.

While this might seem like a lot, it is not so bad since H.U. Group Holdings has a market capitalization of JP¥133.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 H.U. Group Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year H.U. Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to JP¥237b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months H.U. Group Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost JP¥4.0b 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¥1.0b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. We've identified 1 warning sign with H.U. Group Holdings , and understanding them should be part of your investment process.

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.

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