HORIBA (TSE:6856) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that HORIBA, Ltd. (TSE:6856) does use debt in its business. But the more important question is: how much risk is that debt creating?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is HORIBA's Debt?

As you can see below, at the end of December 2024, HORIBA had JP¥64.4b of debt, up from JP¥60.4b a year ago. Click the image for more detail. But it also has JP¥146.3b in cash to offset that, meaning it has JP¥81.9b net cash.

How Healthy Is HORIBA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HORIBA had liabilities of JP¥100.3b due within 12 months and liabilities of JP¥66.6b due beyond that. Offsetting these obligations, it had cash of JP¥146.3b as well as receivables valued at JP¥79.8b due within 12 months. So it actually has JP¥59.2b more liquid assets than total liabilities.

It's good to see that HORIBA has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that HORIBA has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for HORIBA

The good news is that HORIBA has increased its EBIT by 2.2% over twelve months, which should ease any concerns about debt repayment. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HORIBA has net cash of JP¥81.9b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 2.2% in the last twelve months. So we are not troubled with HORIBA's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with HORIBA .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.