Is Fukuda Denshi (TSE:6960) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Fukuda Denshi Co., Ltd. (TSE:6960) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Fukuda Denshi

What Is Fukuda Denshi's Net Debt?

The chart below, which you can click on for greater detail, shows that Fukuda Denshi had JP¥1.80b in debt in December 2023; about the same as the year before. But on the other hand it also has JP¥65.9b in cash, leading to a JP¥64.1b net cash position.

How Strong Is Fukuda Denshi's Balance Sheet?

The latest balance sheet data shows that Fukuda Denshi had liabilities of JP¥31.2b due within a year, and liabilities of JP¥6.29b falling due after that. Offsetting these obligations, it had cash of JP¥65.9b as well as receivables valued at JP¥35.7b due within 12 months. So it actually has JP¥64.1b more liquid assets than total liabilities.

This luscious liquidity implies that Fukuda Denshi's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Fukuda Denshi has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Fukuda Denshi grew its EBIT at 19% over the last year, further increasing its ability to manage debt. 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 Fukuda Denshi 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fukuda Denshi has net cash of JP¥64.1b, as well as more liquid assets than liabilities. And we liked the look of last year's 19% year-on-year EBIT growth. So is Fukuda Denshi's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Fukuda Denshi that you should be aware of before investing here.

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.