Is HORIBA (TSE:6856) Using Too Much 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. We note that HORIBA, Ltd. (TSE:6856) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HORIBA

How Much Debt Does HORIBA Carry?

As you can see below, at the end of September 2024, HORIBA had JP¥63.0b of debt, up from JP¥60.1b a year ago. Click the image for more detail. But on the other hand it also has JP¥130.2b in cash, leading to a JP¥67.2b net cash position.

How Strong Is HORIBA's Balance Sheet?

We can see from the most recent balance sheet that HORIBA had liabilities of JP¥92.6b falling due within a year, and liabilities of JP¥64.7b due beyond that. On the other hand, it had cash of JP¥130.2b and JP¥62.0b worth of receivables due within a year. So it actually has JP¥35.0b 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.

Fortunately, HORIBA grew its EBIT by 6.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Looking at the most recent three years, HORIBA recorded free cash flow of 32% of its EBIT, which is weaker 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¥67.2b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 6.4% in the last twelve months. So we are not troubled with HORIBA's debt use. 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. Case in point: We've spotted 2 warning signs for HORIBA you should be aware of.

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.