Is Hodogaya Chemical (TSE:4112) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Hodogaya Chemical Co., Ltd. (TSE:4112) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Hodogaya Chemical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2025 Hodogaya Chemical had JP¥9.73b of debt, an increase on JP¥8.99b, over one year. However, its balance sheet shows it holds JP¥12.5b in cash, so it actually has JP¥2.73b net cash.

A Look At Hodogaya Chemical's Liabilities

The latest balance sheet data shows that Hodogaya Chemical had liabilities of JP¥13.5b due within a year, and liabilities of JP¥9.23b falling due after that. On the other hand, it had cash of JP¥12.5b and JP¥10.5b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Hodogaya Chemical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥34.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Hodogaya Chemical has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Hodogaya Chemical

It is just as well that Hodogaya Chemical's load is not too heavy, because its EBIT was down 71% over the last year. 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 ultimately the future profitability of the business will decide if Hodogaya Chemical 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 Hodogaya Chemical 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. Over the last three years, Hodogaya Chemical reported free cash flow worth 12% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hodogaya Chemical has net cash of JP¥2.73b, as well as more liquid assets than liabilities. So we are not troubled with Hodogaya Chemical's debt use. 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. Case in point: We've spotted 3 warning signs for Hodogaya Chemical you should be aware of, and 1 of them is potentially serious.

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.