Does Fukuda Denshi (TSE:6960) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Fukuda Denshi Co., Ltd. (TSE:6960) makes use of debt. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fukuda Denshi

What Is Fukuda Denshi's Debt?

The chart below, which you can click on for greater detail, shows that Fukuda Denshi had JP¥1.75b in debt in June 2024; about the same as the year before. However, it does have JP¥62.4b in cash offsetting this, leading to net cash of JP¥60.7b.

How Healthy Is Fukuda Denshi's Balance Sheet?

We can see from the most recent balance sheet that Fukuda Denshi had liabilities of JP¥31.6b falling due within a year, and liabilities of JP¥5.54b due beyond that. On the other hand, it had cash of JP¥62.4b and JP¥33.3b worth of receivables due within a year. So it can boast JP¥58.6b more liquid assets than total liabilities.

It's good to see that Fukuda Denshi has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Fukuda Denshi has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Fukuda Denshi has increased its EBIT by 3.0% over twelve months, which should ease any concerns about debt repayment. 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 Fukuda Denshi'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. While Fukuda Denshi 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. Looking at the most recent three years, Fukuda Denshi recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fukuda Denshi has net cash of JP¥60.7b, as well as more liquid assets than liabilities. And it also grew its EBIT by 3.0% over the last year. So we don't think Fukuda Denshi's use of debt is risky. 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 1 warning sign with Fukuda Denshi , 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.

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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.