Does Fukutome Meat Packers (TSE:2291) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Fukutome Meat Packers, Ltd. (TSE:2291) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fukutome Meat Packers

What Is Fukutome Meat Packers's Debt?

The image below, which you can click on for greater detail, shows that Fukutome Meat Packers had debt of JP¥5.79b at the end of June 2024, a reduction from JP¥6.12b over a year. However, because it has a cash reserve of JP¥2.29b, its net debt is less, at about JP¥3.51b.

How Strong Is Fukutome Meat Packers' Balance Sheet?

The latest balance sheet data shows that Fukutome Meat Packers had liabilities of JP¥7.74b due within a year, and liabilities of JP¥3.64b falling due after that. Offsetting this, it had JP¥2.29b in cash and JP¥2.98b in receivables that were due within 12 months. So it has liabilities totalling JP¥6.12b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the JP¥3.55b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Fukutome Meat Packers would probably need a major re-capitalization if its creditors were to demand repayment. 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 Fukutome Meat Packers will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Fukutome Meat Packers's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Fukutome Meat Packers produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping JP¥510m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through JP¥595m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. For example Fukutome Meat Packers has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.