These 4 Measures Indicate That Hakuhodo DY Holdings (TSE:2433) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Hakuhodo DY Holdings Inc (TSE:2433) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hakuhodo DY Holdings

How Much Debt Does Hakuhodo DY Holdings Carry?

As you can see below, Hakuhodo DY Holdings had JP¥141.3b of debt at September 2024, down from JP¥168.6b a year prior. But it also has JP¥169.9b in cash to offset that, meaning it has JP¥28.6b net cash.

How Strong Is Hakuhodo DY Holdings' Balance Sheet?

According to the last reported balance sheet, Hakuhodo DY Holdings had liabilities of JP¥338.8b due within 12 months, and liabilities of JP¥185.2b due beyond 12 months. On the other hand, it had cash of JP¥169.9b and JP¥331.6b worth of receivables due within a year. So its liabilities total JP¥22.5b more than the combination of its cash and short-term receivables.

Of course, Hakuhodo DY Holdings has a market capitalization of JP¥455.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Hakuhodo DY Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Hakuhodo DY Holdings grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hakuhodo DY Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hakuhodo DY Holdings 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. Considering the last three years, Hakuhodo DY Holdings actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hakuhodo DY Holdings has JP¥28.6b in net cash. And it impressed us with its EBIT growth of 15% over the last year. So we are not troubled with Hakuhodo DY Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Hakuhodo DY Holdings that you should be aware of before investing here.

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.