Does Fujitec (TSE:6406) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Fujitec Co., Ltd. (TSE:6406) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Fujitec

How Much Debt Does Fujitec Carry?

The chart below, which you can click on for greater detail, shows that Fujitec had JP¥5.50b in debt in December 2024; about the same as the year before. But it also has JP¥75.1b in cash to offset that, meaning it has JP¥69.6b net cash.

A Look At Fujitec's Liabilities

Zooming in on the latest balance sheet data, we can see that Fujitec had liabilities of JP¥82.9b due within 12 months and liabilities of JP¥7.47b due beyond that. Offsetting these obligations, it had cash of JP¥75.1b as well as receivables valued at JP¥82.4b due within 12 months. So it can boast JP¥67.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Fujitec could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Fujitec boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Fujitec grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fujitec's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Fujitec 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. Considering the last three years, Fujitec actually recorded a cash outflow, overall. 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 investigate a company's debt, in this case Fujitec has JP¥69.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 19% year-on-year EBIT growth. So we don't have any problem with Fujitec's use of debt. 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. We've identified 2 warning signs with Fujitec , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.