These 4 Measures Indicate That HOYA (TSE:7741) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 HOYA Corporation (TSE:7741) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is HOYA's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 HOYA had JP¥35.6b of debt, an increase on JP¥26.0b, over one year. However, its balance sheet shows it holds JP¥579.3b in cash, so it actually has JP¥543.7b net cash.

How Strong Is HOYA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HOYA had liabilities of JP¥175.4b due within 12 months and liabilities of JP¥88.6b due beyond that. Offsetting this, it had JP¥579.3b in cash and JP¥174.8b in receivables that were due within 12 months. So it actually has JP¥490.2b more liquid assets than total liabilities.

This surplus suggests that HOYA has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HOYA has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for HOYA

The good news is that HOYA has increased its EBIT by 8.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HOYA can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HOYA has net cash of JP¥543.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥199b, being 83% of its EBIT. So we don't think HOYA's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of HOYA's earnings per share history for free.

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.