We Think Hisamitsu Pharmaceutical (TSE:4530) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Hisamitsu Pharmaceutical

What Is Hisamitsu Pharmaceutical's Debt?

As you can see below, Hisamitsu Pharmaceutical had JP¥1.12b of debt at August 2024, down from JP¥1.18b a year prior. However, it does have JP¥122.7b in cash offsetting this, leading to net cash of JP¥121.6b.

How Strong Is Hisamitsu Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Hisamitsu Pharmaceutical had liabilities of JP¥58.6b falling due within a year, and liabilities of JP¥15.9b due beyond that. On the other hand, it had cash of JP¥122.7b and JP¥51.6b worth of receivables due within a year. So it actually has JP¥99.8b more liquid assets than total liabilities.

This luscious liquidity implies that Hisamitsu Pharmaceutical's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hisamitsu Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Hisamitsu Pharmaceutical saw its EBIT decline by 8.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hisamitsu Pharmaceutical 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Hisamitsu Pharmaceutical 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. In the last three years, Hisamitsu Pharmaceutical's free cash flow amounted to 30% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hisamitsu Pharmaceutical has net cash of JP¥121.6b, as well as more liquid assets than liabilities. So we are not troubled with Hisamitsu Pharmaceutical'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. Case in point: We've spotted 1 warning sign for Hisamitsu Pharmaceutical you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.