Human Creation Holdings (TSE:7361) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Human Creation Holdings, Inc. (TSE:7361) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Human Creation Holdings

How Much Debt Does Human Creation Holdings Carry?

The image below, which you can click on for greater detail, shows that Human Creation Holdings had debt of JP¥573.0m at the end of March 2024, a reduction from JP¥877.0m over a year. But on the other hand it also has JP¥994.0m in cash, leading to a JP¥421.0m net cash position.

A Look At Human Creation Holdings' Liabilities

According to the last reported balance sheet, Human Creation Holdings had liabilities of JP¥1.27b due within 12 months, and liabilities of JP¥515.0m due beyond 12 months. On the other hand, it had cash of JP¥994.0m and JP¥879.0m worth of receivables due within a year. So it can boast JP¥85.0m more liquid assets than total liabilities.

This surplus suggests that Human Creation Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Human Creation Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Human Creation Holdings's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Human Creation Holdings 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. Human Creation Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Human Creation Holdings generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Human Creation Holdings has net cash of JP¥421.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥1.1b, being 94% of its EBIT. So we don't think Human Creation Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Human Creation Holdings , and understanding them should be part of your investment process.

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.

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