Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Howtelevision, Inc. (TSE:7064) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Howtelevision
What Is Howtelevision's Debt?
As you can see below, Howtelevision had JPĀ„552.0m of debt at April 2024, down from JPĀ„584.0m a year prior. However, its balance sheet shows it holds JPĀ„1.39b in cash, so it actually has JPĀ„840.0m net cash.
A Look At Howtelevision's Liabilities
We can see from the most recent balance sheet that Howtelevision had liabilities of JPĀ„726.0m falling due within a year, and liabilities of JPĀ„384.0m due beyond that. Offsetting this, it had JPĀ„1.39b in cash and JPĀ„115.0m in receivables that were due within 12 months. So it actually has JPĀ„397.0m more liquid assets than total liabilities.
This surplus suggests that Howtelevision has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Howtelevision boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Howtelevision has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Howtelevision can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Howtelevision 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, Howtelevision actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While it is always sensible to investigate a company's debt, in this case Howtelevision has JPĀ„840.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JPĀ„308m, being 103% of its EBIT. So we don't think Howtelevision's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Howtelevision .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About TSE:7064
Undervalued with solid track record.
