Fuji Glass (TYO:5212) Seems To Use Debt Rather Sparingly

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.' 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 Fuji Glass Co., Ltd. (TYO:5212) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fuji Glass

What Is Fuji Glass's Debt?

The chart below, which you can click on for greater detail, shows that Fuji Glass had JP¥216.0m in debt in September 2020; about the same as the year before. But it also has JP¥787.0m in cash to offset that, meaning it has JP¥571.0m net cash.

How Healthy Is Fuji Glass' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fuji Glass had liabilities of JP¥479.0m due within 12 months and liabilities of JP¥802.0m due beyond that. Offsetting these obligations, it had cash of JP¥787.0m as well as receivables valued at JP¥763.0m due within 12 months. So it actually has JP¥269.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Fuji Glass could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fuji Glass has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Fuji Glass grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fuji Glass'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fuji Glass 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. Happily for any shareholders, Fuji Glass actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Fuji Glass has JP¥571.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in -JP¥45m. So we don't think Fuji Glass's use of debt is risky. 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. For instance, we've identified 4 warning signs for Fuji Glass (1 doesn't sit too well with us) you should be aware of.

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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