These 4 Measures Indicate That Fuji Glass (TYO:5212) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Fuji Glass Co., Ltd. (TYO:5212) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fuji Glass

What Is Fuji Glass's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Fuji Glass had JP¥250.0m of debt, an increase on JP¥225.0m, over one year. However, it does have JP¥820.0m in cash offsetting this, leading to net cash of JP¥570.0m.

How Strong Is Fuji Glass' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fuji Glass had liabilities of JP¥467.0m due within 12 months and liabilities of JP¥838.0m due beyond that. On the other hand, it had cash of JP¥820.0m and JP¥772.0m worth of receivables due within a year. So it actually has JP¥287.0m 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.

In addition to that, we're happy to report that Fuji Glass has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fuji Glass 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Fuji Glass may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Fuji Glass actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Fuji Glass has JP¥570.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -JP¥21m, being 161% of its EBIT. So we don't think Fuji Glass's use of debt is 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. We've identified 2 warning signs with Fuji Glass , and understanding them should be part of your investment process.

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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.