Hybrid Technologies (TSE:4260) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Hybrid Technologies Co., Ltd. (TSE:4260) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hybrid Technologies

What Is Hybrid Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hybrid Technologies had JP¥335.0m of debt, an increase on JP¥14.0m, over one year. But on the other hand it also has JP¥1.36b in cash, leading to a JP¥1.02b net cash position.

How Strong Is Hybrid Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hybrid Technologies had liabilities of JP¥760.0m due within 12 months and liabilities of JP¥1.03b due beyond that. On the other hand, it had cash of JP¥1.36b and JP¥343.0m worth of receivables due within a year. So it has liabilities totalling JP¥84.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that Hybrid Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥5.64b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Hybrid Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Hybrid Technologies's EBIT was down 48% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hybrid Technologies 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 Hybrid Technologies 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, Hybrid Technologies 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Hybrid Technologies has JP¥1.02b in net cash. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in JP¥351m. So we don't have any problem with Hybrid Technologies's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hybrid Technologies is showing 4 warning signs in our investment analysis , you should know about...

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.