These 4 Measures Indicate That Hamamatsu Photonics K.K (TSE:6965) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Hamamatsu Photonics K.K. (TSE:6965) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out 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 September 2024 Hamamatsu Photonics K.K had JP¥36.9b of debt, an increase on JP¥12.5b, over one year. But it also has JP¥99.9b in cash to offset that, meaning it has JP¥63.0b net cash.

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

Zooming in on the latest balance sheet data, we can see that Hamamatsu Photonics K.K had liabilities of JP¥80.7b due within 12 months and liabilities of JP¥20.9b due beyond that. On the other hand, it had cash of JP¥99.9b and JP¥45.3b worth of receivables due within a year. So it can boast JP¥43.6b more liquid assets than total liabilities.

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

It is just as well that Hamamatsu Photonics K.K's load is not too heavy, because its EBIT was down 43% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Hamamatsu Photonics K.K 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 Hamamatsu Photonics K.K 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, Hamamatsu Photonics K.K's free cash flow amounted to 27% of its EBIT, less 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¥63.0b in net cash and a decent-looking balance sheet. So we don't have any problem with Hamamatsu Photonics K.K's use of debt. 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. To that end, you should be aware of the 3 warning signs we've spotted with Hamamatsu Photonics K.K .

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.