Fujimi (TSE:5384) Could Easily Take On More Debt

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.' 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 Fujimi Incorporated (TSE:5384) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Fujimi's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Fujimi had debt of JP¥10.0b, up from none in one year. However, it does have JP¥27.0b in cash offsetting this, leading to net cash of JP¥17.0b.

How Strong Is Fujimi's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fujimi had liabilities of JP¥11.5b due within 12 months and liabilities of JP¥11.7b due beyond that. Offsetting this, it had JP¥27.0b in cash and JP¥13.1b in receivables that were due within 12 months. So it can boast JP¥16.9b more liquid assets than total liabilities.

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

See our latest analysis for Fujimi

In addition to that, we're happy to report that Fujimi has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fujimi's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fujimi 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, Fujimi recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fujimi has JP¥17.0b in net cash and a decent-looking balance sheet. And we liked the look of last year's 46% year-on-year EBIT growth. So we don't think Fujimi'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 example - Fujimi has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.