Harima-KyowaLTD (TSE:7444) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Harima-Kyowa Co.,LTD. (TSE:7444) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Harima-KyowaLTD

What Is Harima-KyowaLTD's Debt?

As you can see below, at the end of December 2023, Harima-KyowaLTD had JP¥320.0m of debt, up from JP¥260.0m a year ago. Click the image for more detail. But on the other hand it also has JP¥2.82b in cash, leading to a JP¥2.50b net cash position.

How Healthy Is Harima-KyowaLTD's Balance Sheet?

The latest balance sheet data shows that Harima-KyowaLTD had liabilities of JP¥7.68b due within a year, and liabilities of JP¥1.53b falling due after that. Offsetting these obligations, it had cash of JP¥2.82b as well as receivables valued at JP¥11.5b due within 12 months. So it can boast JP¥5.14b more liquid assets than total liabilities.

This surplus liquidity suggests that Harima-KyowaLTD's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Harima-KyowaLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Harima-KyowaLTD has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Harima-KyowaLTD's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Harima-KyowaLTD 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, Harima-KyowaLTD's free cash flow amounted to 44% of its EBIT, less 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 Harima-KyowaLTD has net cash of JP¥2.50b, as well as more liquid assets than liabilities. So we are not troubled with Harima-KyowaLTD's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Harima-KyowaLTD , and understanding them should be part of your investment process.

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.