Here's Why Hamamatsu Photonics K.K (TSE:6965) Can Manage Its Debt Responsibly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hamamatsu Photonics K.K. (TSE:6965) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hamamatsu Photonics K.K

What Is Hamamatsu Photonics K.K's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hamamatsu Photonics K.K had JP¥13.1b of debt, an increase on JP¥11.5b, over one year. But on the other hand it also has JP¥128.8b in cash, leading to a JP¥115.7b net cash position.

How Healthy Is Hamamatsu Photonics K.K's Balance Sheet?

We can see from the most recent balance sheet that Hamamatsu Photonics K.K had liabilities of JP¥58.0b falling due within a year, and liabilities of JP¥15.4b due beyond that. Offsetting this, it had JP¥128.8b in cash and JP¥44.6b in receivables that were due within 12 months. So it can boast JP¥100.0b more liquid assets than total liabilities.

This surplus suggests that Hamamatsu Photonics K.K is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hamamatsu Photonics K.K boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Hamamatsu Photonics K.K if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hamamatsu Photonics K.K 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hamamatsu Photonics K.K 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. Looking at the most recent three years, Hamamatsu Photonics K.K recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hamamatsu Photonics K.K has JP¥115.7b in net cash and a decent-looking balance sheet. So we are not troubled with Hamamatsu Photonics K.K's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Hamamatsu Photonics K.K's earnings per share history for free.

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.

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