Does Ishii Hyoki (TSE:6336) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Ishii Hyoki Co., Ltd. (TSE:6336) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ishii Hyoki

How Much Debt Does Ishii Hyoki Carry?

You can click the graphic below for the historical numbers, but it shows that Ishii Hyoki had JP¥1.51b of debt in October 2024, down from JP¥3.40b, one year before. However, its balance sheet shows it holds JP¥3.84b in cash, so it actually has JP¥2.33b net cash.

A Look At Ishii Hyoki's Liabilities

Zooming in on the latest balance sheet data, we can see that Ishii Hyoki had liabilities of JP¥3.74b due within 12 months and liabilities of JP¥2.15b due beyond that. Offsetting this, it had JP¥3.84b in cash and JP¥3.00b in receivables that were due within 12 months. So it actually has JP¥952.0m more liquid assets than total liabilities.

This surplus suggests that Ishii Hyoki 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. Succinctly put, Ishii Hyoki boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Ishii Hyoki if management cannot prevent a repeat of the 46% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Ishii Hyoki will need earnings to service that debt. 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. While Ishii Hyoki 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. Over the most recent three years, Ishii Hyoki recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ishii Hyoki has net cash of JP¥2.33b, as well as more liquid assets than liabilities. So we are not troubled with Ishii Hyoki'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. For example - Ishii Hyoki has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.