FusionLtd (SPSE:3977) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Fusion Co.,Ltd. (SPSE:3977) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 FusionLtd

How Much Debt Does FusionLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2020 FusionLtd had JP¥236.0m of debt, an increase on JP¥164.0m, over one year. However, its balance sheet shows it holds JP¥292.0m in cash, so it actually has JP¥56.0m net cash.

How Strong Is FusionLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FusionLtd had liabilities of JP¥198.0m due within 12 months and liabilities of JP¥196.0m due beyond that. Offsetting these obligations, it had cash of JP¥292.0m as well as receivables valued at JP¥140.0m due within 12 months. So it actually has JP¥38.0m more liquid assets than total liabilities.

This short term liquidity is a sign that FusionLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, FusionLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is FusionLtd'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.

In the last year FusionLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.4%, to JP¥1.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is FusionLtd?

Although FusionLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥80m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 2 warning signs for FusionLtd you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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