Fuji Seal International (TSE:7864) Seems To Use Debt Rather Sparingly

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. Importantly, Fuji Seal International, Inc. (TSE:7864) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fuji Seal International

What Is Fuji Seal International's Net Debt?

The image below, which you can click on for greater detail, shows that Fuji Seal International had debt of JP¥8.65b at the end of December 2024, a reduction from JP¥13.9b over a year. But on the other hand it also has JP¥29.2b in cash, leading to a JP¥20.6b net cash position.

How Strong Is Fuji Seal International's Balance Sheet?

According to the last reported balance sheet, Fuji Seal International had liabilities of JP¥52.7b due within 12 months, and liabilities of JP¥8.52b due beyond 12 months. On the other hand, it had cash of JP¥29.2b and JP¥63.6b worth of receivables due within a year. So it actually has JP¥31.6b more liquid assets than total liabilities.

This excess liquidity suggests that Fuji Seal International is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Fuji Seal International boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Fuji Seal International has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fuji Seal International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fuji Seal International 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 most recent three years, Fuji Seal International recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fuji Seal International has net cash of JP¥20.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 65% over the last year. So we don't think Fuji Seal International's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Fuji Seal International, you may well want to click here to check an interactive graph of its earnings per share history.

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.