These 4 Measures Indicate That Hottolink (TSE:3680) Is Using Debt Safely

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. Importantly, Hottolink, Inc. (TSE:3680) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Hottolink

What Is Hottolink's Net Debt?

The image below, which you can click on for greater detail, shows that Hottolink had debt of JP¥675.0m at the end of September 2024, a reduction from JP¥798.0m over a year. However, its balance sheet shows it holds JP¥3.26b in cash, so it actually has JP¥2.59b net cash.

A Look At Hottolink's Liabilities

We can see from the most recent balance sheet that Hottolink had liabilities of JP¥819.0m falling due within a year, and liabilities of JP¥1.20b due beyond that. Offsetting these obligations, it had cash of JP¥3.26b as well as receivables valued at JP¥514.0m due within 12 months. So it actually has JP¥1.76b more liquid assets than total liabilities.

This excess liquidity is a great indication that Hottolink's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Hottolink has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Hottolink's saving grace is its low debt levels, because its EBIT has tanked 88% in the last twelve months. 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 ultimately the future profitability of the business will decide if Hottolink 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hottolink 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. Happily for any shareholders, Hottolink actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hottolink has net cash of JP¥2.59b, as well as more liquid assets than liabilities. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in -JP¥230m. So is Hottolink's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Hottolink .

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.