Is HOYA (TSE:7741) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies HOYA Corporation (TSE:7741) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for HOYA

How Much Debt Does HOYA Carry?

The image below, which you can click on for greater detail, shows that at September 2024 HOYA had debt of JP¥31.7b, up from JP¥25.6b in one year. However, its balance sheet shows it holds JP¥546.4b in cash, so it actually has JP¥514.7b net cash.

A Look At HOYA's Liabilities

According to the last reported balance sheet, HOYA had liabilities of JP¥173.1b due within 12 months, and liabilities of JP¥81.1b due beyond 12 months. Offsetting these obligations, it had cash of JP¥546.4b as well as receivables valued at JP¥169.7b due within 12 months. So it actually has JP¥461.9b more liquid assets than total liabilities.

This short term liquidity is a sign that HOYA could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HOYA has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that HOYA has increased its EBIT by 9.6% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HOYA'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. HOYA 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. Over the last three years, HOYA recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case HOYA has JP¥514.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥184b, being 83% of its EBIT. So we don't think HOYA's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in HOYA, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.