Is Hokuriku Electric IndustryLtd (TSE:6989) A Risky Investment?

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. Importantly, Hokuriku Electric Industry Co.,Ltd. (TSE:6989) does carry 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hokuriku Electric IndustryLtd

What Is Hokuriku Electric IndustryLtd's Debt?

The image below, which you can click on for greater detail, shows that Hokuriku Electric IndustryLtd had debt of JP¥9.58b at the end of March 2024, a reduction from JP¥11.1b over a year. However, it does have JP¥10.1b in cash offsetting this, leading to net cash of JP¥536.0m.

How Strong Is Hokuriku Electric IndustryLtd's Balance Sheet?

According to the last reported balance sheet, Hokuriku Electric IndustryLtd had liabilities of JP¥11.5b due within 12 months, and liabilities of JP¥10.0b due beyond 12 months. On the other hand, it had cash of JP¥10.1b and JP¥7.99b worth of receivables due within a year. So its liabilities total JP¥3.44b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hokuriku Electric IndustryLtd has a market capitalization of JP¥9.40b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Hokuriku Electric IndustryLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Hokuriku Electric IndustryLtd's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hokuriku Electric IndustryLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hokuriku Electric IndustryLtd 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. In the last three years, Hokuriku Electric IndustryLtd's free cash flow amounted to 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Hokuriku Electric IndustryLtd does have more liabilities than liquid assets, it also has net cash of JP¥536.0m. So although we see some areas for improvement, we're not too worried about Hokuriku Electric IndustryLtd's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hokuriku Electric IndustryLtd is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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