Does FUJITA CORPORATIONLtd (TSE:3370) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, FUJITA CORPORATION Co.,Ltd. (TSE:3370) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 FUJITA CORPORATIONLtd Carry?

As you can see below, FUJITA CORPORATIONLtd had JP¥2.04b of debt at March 2025, down from JP¥2.18b a year prior. However, because it has a cash reserve of JP¥365.0m, its net debt is less, at about JP¥1.67b.

A Look At FUJITA CORPORATIONLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that FUJITA CORPORATIONLtd had liabilities of JP¥785.0m due within 12 months and liabilities of JP¥1.78b due beyond that. Offsetting this, it had JP¥365.0m in cash and JP¥180.0m in receivables that were due within 12 months. So its liabilities total JP¥2.02b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the JP¥1.29b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, FUJITA CORPORATIONLtd would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for FUJITA CORPORATIONLtd

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 2.2 times and a disturbingly high net debt to EBITDA ratio of 6.4 hit our confidence in FUJITA CORPORATIONLtd like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. On the other hand, FUJITA CORPORATIONLtd grew its EBIT by 21% in the last year. If it can maintain that kind of improvement, its debt load will begin to melt away like glaciers in a warming world. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since FUJITA CORPORATIONLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent two years, FUJITA CORPORATIONLtd recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

To be frank both FUJITA CORPORATIONLtd's level of total liabilities and its track record of managing its debt, based on its EBITDA, make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. We're quite clear that we consider FUJITA CORPORATIONLtd to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example FUJITA CORPORATIONLtd has 4 warning signs (and 3 which are potentially serious) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.