Does Fuso ChemicalLtd (TSE:4368) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Fuso Chemical Co.,Ltd. (TSE:4368) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fuso ChemicalLtd

What Is Fuso ChemicalLtd's Debt?

As you can see below, at the end of March 2024, Fuso ChemicalLtd had JP¥20.0b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has JP¥31.5b in cash, leading to a JP¥11.5b net cash position.

How Strong Is Fuso ChemicalLtd's Balance Sheet?

We can see from the most recent balance sheet that Fuso ChemicalLtd had liabilities of JP¥16.5b falling due within a year, and liabilities of JP¥22.3b due beyond that. Offsetting these obligations, it had cash of JP¥31.5b as well as receivables valued at JP¥16.4b due within 12 months. So it can boast JP¥9.20b more liquid assets than total liabilities.

This surplus suggests that Fuso ChemicalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Fuso ChemicalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Fuso ChemicalLtd's load is not too heavy, because its EBIT was down 41% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fuso ChemicalLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fuso ChemicalLtd 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. Over the last three years, Fuso ChemicalLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fuso ChemicalLtd has net cash of JP¥11.5b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Fuso ChemicalLtd's balance sheet. 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. Be aware that Fuso ChemicalLtd is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

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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.

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