Does HEROZ (TSE:4382) 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 HEROZ, Inc. (TSE:4382) makes use of debt. But should shareholders be worried about its use of debt?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

What Is HEROZ's Debt?

You can click the graphic below for the historical numbers, but it shows that as of April 2025 HEROZ had JP¥2.05b of debt, an increase on JP¥1.40b, over one year. However, its balance sheet shows it holds JP¥3.14b in cash, so it actually has JP¥1.09b net cash.

A Look At HEROZ's Liabilities

Zooming in on the latest balance sheet data, we can see that HEROZ had liabilities of JP¥1.49b due within 12 months and liabilities of JP¥1.46b due beyond that. On the other hand, it had cash of JP¥3.14b and JP¥831.0m worth of receivables due within a year. So it can boast JP¥1.03b more liquid assets than total liabilities.

This surplus suggests that HEROZ has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, HEROZ boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for HEROZ

The modesty of its debt load may become crucial for HEROZ if management cannot prevent a repeat of the 31% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 HEROZ'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HEROZ 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. Looking at the most recent three years, HEROZ recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case HEROZ has JP¥1.09b in net cash and a decent-looking balance sheet. So we don't have any problem with HEROZ's use of debt. 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. Be aware that HEROZ is showing 1 warning sign in our investment analysis , you should know about...

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.

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

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.