Does HORIBA (TSE:6856) Have A 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.' 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. We note that HORIBA, Ltd. (TSE:6856) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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 HORIBA

What Is HORIBA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 HORIBA had JP¥66.9b of debt, an increase on JP¥57.9b, over one year. But on the other hand it also has JP¥136.4b in cash, leading to a JP¥69.5b net cash position.

A Look At HORIBA's Liabilities

We can see from the most recent balance sheet that HORIBA had liabilities of JP¥99.7b falling due within a year, and liabilities of JP¥65.9b due beyond that. Offsetting this, it had JP¥136.4b in cash and JP¥66.7b in receivables that were due within 12 months. So it can boast JP¥37.5b more liquid assets than total liabilities.

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

HORIBA'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 ultimately the future profitability of the business will decide if HORIBA 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, a company can only pay off debt with cold hard cash, not accounting profits. While HORIBA 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. In the last three years, HORIBA's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HORIBA has net cash of JP¥69.5b, as well as more liquid assets than liabilities. So we are not troubled with HORIBA's debt use. 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. We've identified 2 warning signs with HORIBA , and understanding them should be part of your investment process.

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.