Does HOUSEI (TSE:5035) Have A Healthy Balance Sheet?

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, HOUSEI Inc. (TSE:5035) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for HOUSEI

What Is HOUSEI's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 HOUSEI had JP¥911.0m of debt, an increase on JP¥492.0m, over one year. But it also has JP¥1.02b in cash to offset that, meaning it has JP¥113.0m net cash.

How Healthy Is HOUSEI's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HOUSEI had liabilities of JP¥1.28b due within 12 months and liabilities of JP¥574.0m due beyond that. Offsetting this, it had JP¥1.02b in cash and JP¥586.0m in receivables that were due within 12 months. So its liabilities total JP¥245.0m more than the combination of its cash and short-term receivables.

Since publicly traded HOUSEI shares are worth a total of JP¥3.26b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, HOUSEI boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that HOUSEI's load is not too heavy, because its EBIT was down 92% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HOUSEI 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While HOUSEI 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 last three years, HOUSEI saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about HOUSEI's liabilities, but we can be reassured by the fact it has has net cash of JP¥113.0m. So although we see some areas for improvement, we're not too worried about HOUSEI's balance sheet. 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 HOUSEI is showing 4 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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.