Is Healios K.K (TSE:4593) Using Too Much Debt?

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. We can see that Healios K.K. (TSE:4593) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Healios K.K

What Is Healios K.K's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Healios K.K had JP¥4.43b of debt in March 2024, down from JP¥6.90b, one year before. However, its balance sheet shows it holds JP¥8.39b in cash, so it actually has JP¥3.96b net cash.

A Look At Healios K.K's Liabilities

According to the last reported balance sheet, Healios K.K had liabilities of JP¥6.80b due within 12 months, and liabilities of JP¥5.97b due beyond 12 months. On the other hand, it had cash of JP¥8.39b and JP¥333.0m worth of receivables due within a year. So it has liabilities totalling JP¥4.05b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Healios K.K has a market capitalization of JP¥14.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Healios K.K also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Healios K.K's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Healios K.K wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to JP¥124m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Healios K.K?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Healios K.K had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥2.8b of cash and made a loss of JP¥5.5b. But the saving grace is the JP¥3.96b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Healios K.K's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 5 warning signs for Healios K.K (2 don't sit too well with us!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.