Fast Retailing (TSE:9983) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Fast Retailing Co., Ltd. (TSE:9983) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Fast Retailing

What Is Fast Retailing's Net Debt?

The image below, which you can click on for greater detail, shows that Fast Retailing had debt of JP¥239.7b at the end of May 2024, a reduction from JP¥319.7b over a year. But on the other hand it also has JP¥1.65t in cash, leading to a JP¥1.41t net cash position.

How Healthy Is Fast Retailing's Balance Sheet?

According to the last reported balance sheet, Fast Retailing had liabilities of JP¥743.8b due within 12 months, and liabilities of JP¥744.7b due beyond 12 months. Offsetting this, it had JP¥1.65t in cash and JP¥112.4b in receivables that were due within 12 months. So it can boast JP¥272.2b more liquid assets than total liabilities.

This state of affairs indicates that Fast Retailing's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥15t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Fast Retailing boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Fast Retailing grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fast Retailing's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fast Retailing 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. Over the last three years, Fast Retailing actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fast Retailing has JP¥1.41t in net cash and a decent-looking balance sheet. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in JP¥507b. So is Fast Retailing's debt a risk? It doesn't seem so to us. We'd be very excited to see if Fast Retailing insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.