These 4 Measures Indicate That HABA LaboratoriesInc (TYO:4925) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that HABA Laboratories,Inc. (TYO:4925) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HABA LaboratoriesInc

What Is HABA LaboratoriesInc's Net Debt?

As you can see below, at the end of December 2020, HABA LaboratoriesInc had JP¥3.91b of debt, up from JP¥2.77b a year ago. Click the image for more detail. But on the other hand it also has JP¥4.93b in cash, leading to a JP¥1.03b net cash position.

A Look At HABA LaboratoriesInc's Liabilities

We can see from the most recent balance sheet that HABA LaboratoriesInc had liabilities of JP¥3.47b falling due within a year, and liabilities of JP¥1.96b due beyond that. Offsetting these obligations, it had cash of JP¥4.93b as well as receivables valued at JP¥1.31b due within 12 months. So it actually has JP¥811.0m more liquid assets than total liabilities.

This short term liquidity is a sign that HABA LaboratoriesInc could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, HABA LaboratoriesInc boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact HABA LaboratoriesInc's saving grace is its low debt levels, because its EBIT has tanked 97% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is HABA LaboratoriesInc's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HABA LaboratoriesInc 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, HABA LaboratoriesInc reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that HABA LaboratoriesInc has net cash of JP¥1.03b, as well as more liquid assets than liabilities. So we are not troubled with HABA LaboratoriesInc's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 HABA LaboratoriesInc (of which 1 doesn't sit too well with us!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you decide to trade HABA LaboratoriesInc, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.