These 4 Measures Indicate That Hard Off CorporationLtd (TSE:2674) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Hard Off Corporation Co.,Ltd. (TSE:2674) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Hard Off CorporationLtd

What Is Hard Off CorporationLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Hard Off CorporationLtd had debt of JP¥2.12b, up from JP¥1.75b in one year. But it also has JP¥3.02b in cash to offset that, meaning it has JP¥904.0m net cash.

How Strong Is Hard Off CorporationLtd's Balance Sheet?

According to the last reported balance sheet, Hard Off CorporationLtd had liabilities of JP¥4.94b due within 12 months, and liabilities of JP¥1.16b due beyond 12 months. Offsetting this, it had JP¥3.02b in cash and JP¥1.24b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.84b.

Of course, Hard Off CorporationLtd has a market capitalization of JP¥24.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Hard Off CorporationLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Hard Off CorporationLtd grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hard Off CorporationLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hard Off CorporationLtd 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. In the last three years, Hard Off CorporationLtd's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hard Off CorporationLtd has JP¥904.0m in net cash. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't think Hard Off CorporationLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hard Off CorporationLtd is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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