Does Hisamitsu Pharmaceutical (TSE:4530) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Hisamitsu Pharmaceutical Co., Inc. (TSE:4530) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Hisamitsu Pharmaceutical

How Much Debt Does Hisamitsu Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that at November 2024 Hisamitsu Pharmaceutical had debt of JP¥2.93b, up from JP¥1.17b in one year. However, its balance sheet shows it holds JP¥116.6b in cash, so it actually has JP¥113.7b net cash.

A Look At Hisamitsu Pharmaceutical's Liabilities

We can see from the most recent balance sheet that Hisamitsu Pharmaceutical had liabilities of JP¥55.5b falling due within a year, and liabilities of JP¥17.0b due beyond that. Offsetting these obligations, it had cash of JP¥116.6b as well as receivables valued at JP¥44.5b due within 12 months. So it actually has JP¥88.7b more liquid assets than total liabilities.

This surplus suggests that Hisamitsu Pharmaceutical is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hisamitsu Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Hisamitsu Pharmaceutical saw its EBIT decline by 8.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Hisamitsu Pharmaceutical'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hisamitsu Pharmaceutical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Hisamitsu Pharmaceutical recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hisamitsu Pharmaceutical has net cash of JP¥113.7b, as well as more liquid assets than liabilities. So we are not troubled with Hisamitsu Pharmaceutical's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Hisamitsu Pharmaceutical has 1 warning sign we think you should be aware of.

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.

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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.