Is Fudo Tetra (TSE:1813) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Fudo Tetra Corporation (TSE:1813) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fudo Tetra

How Much Debt Does Fudo Tetra Carry?

You can click the graphic below for the historical numbers, but it shows that Fudo Tetra had JP¥4.56b of debt in March 2024, down from JP¥5.63b, one year before. But it also has JP¥11.8b in cash to offset that, meaning it has JP¥7.24b net cash.

How Healthy Is Fudo Tetra's Balance Sheet?

We can see from the most recent balance sheet that Fudo Tetra had liabilities of JP¥20.4b falling due within a year, and liabilities of JP¥1.55b due beyond that. Offsetting this, it had JP¥11.8b in cash and JP¥8.63b in receivables that were due within 12 months. So it has liabilities totalling JP¥1.56b more than its cash and near-term receivables, combined.

Given Fudo Tetra has a market capitalization of JP¥30.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Fudo Tetra boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Fudo Tetra if management cannot prevent a repeat of the 26% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fudo Tetra's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fudo Tetra 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. Over the last three years, Fudo Tetra recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fudo Tetra has JP¥7.24b in net cash. So while Fudo Tetra does not have a great balance sheet, it's certainly not too bad. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Fudo Tetra's dividend history, without delay!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com