Health Check: How Prudently Does Hanshin Machinery (KRX:011700) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hanshin Machinery Co., Ltd. (KRX:011700) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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.

See our latest analysis for Hanshin Machinery

What Is Hanshin Machinery's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hanshin Machinery had ₩16.4b of debt, an increase on ₩2.29b, over one year. However, it does have ₩36.5b in cash offsetting this, leading to net cash of ₩20.1b.

A Look At Hanshin Machinery's Liabilities

According to the last reported balance sheet, Hanshin Machinery had liabilities of ₩25.9b due within 12 months, and liabilities of ₩9.56b due beyond 12 months. On the other hand, it had cash of ₩36.5b and ₩26.0b worth of receivables due within a year. So it can boast ₩27.0b more liquid assets than total liabilities.

This surplus suggests that Hanshin Machinery is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Hanshin Machinery boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hanshin Machinery will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hanshin Machinery had a loss before interest and tax, and actually shrunk its revenue by 6.9%, to ₩55b. That's not what we would hope to see.

So How Risky Is Hanshin Machinery?

Although Hanshin Machinery had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩1.1b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example Hanshin Machinery has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.