Does MARUKA FURUSATO (TSE:7128) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that MARUKA FURUSATO Corporation (TSE:7128) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MARUKA FURUSATO

What Is MARUKA FURUSATO's Debt?

As you can see below, MARUKA FURUSATO had JP¥915.0m of debt at March 2024, down from JP¥1.79b a year prior. However, it does have JP¥20.7b in cash offsetting this, leading to net cash of JP¥19.8b.

How Strong Is MARUKA FURUSATO's Balance Sheet?

We can see from the most recent balance sheet that MARUKA FURUSATO had liabilities of JP¥44.7b falling due within a year, and liabilities of JP¥2.66b due beyond that. Offsetting these obligations, it had cash of JP¥20.7b as well as receivables valued at JP¥41.3b due within 12 months. So it actually has JP¥14.6b more liquid assets than total liabilities.

This surplus suggests that MARUKA FURUSATO 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. Succinctly put, MARUKA FURUSATO boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact MARUKA FURUSATO's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. 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 MARUKA FURUSATO's earnings that will influence how the balance sheet holds up in the future. 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 MARUKA FURUSATO 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. In the last three years, MARUKA FURUSATO created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MARUKA FURUSATO has net cash of JP¥19.8b, as well as more liquid assets than liabilities. So we don't have any problem with MARUKA FURUSATO's use of debt. 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. We've identified 1 warning sign with MARUKA FURUSATO , and understanding them should be part of your investment process.

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