Here's Why Hanshin Machinery (KRX:011700) 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 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 Hanshin Machinery Co., Ltd. (KRX:011700) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Hanshin Machinery Carry?

As you can see below, at the end of June 2025, Hanshin Machinery had ₩16.4b of debt, up from ₩15.8b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩26.3b in cash, so it actually has ₩9.85b net cash.

How Strong Is Hanshin Machinery's Balance Sheet?

We can see from the most recent balance sheet that Hanshin Machinery had liabilities of ₩16.1b falling due within a year, and liabilities of ₩10.5b due beyond that. On the other hand, it had cash of ₩26.3b and ₩16.4b worth of receivables due within a year. So it can boast ₩16.1b 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. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Hanshin Machinery has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Hanshin Machinery

It was also good to see that despite losing money on the EBIT line last year, Hanshin Machinery turned things around in the last 12 months, delivering and EBIT of ₩281m. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hanshin Machinery 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. During the last year, Hanshin Machinery burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hanshin Machinery has net cash of ₩9.85b, as well as more liquid assets than liabilities. So we are not troubled with Hanshin Machinery's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Hanshin Machinery you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.