Is Fast Retailing (TSE:9983) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Fast Retailing Co., Ltd. (TSE:9983) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Fast Retailing's Debt?

As you can see below, Fast Retailing had JP¥141.1b of debt at May 2025, down from JP¥239.7b a year prior. But on the other hand it also has JP¥1.63t in cash, leading to a JP¥1.49t net cash position.

A Look At Fast Retailing's Liabilities

Zooming in on the latest balance sheet data, we can see that Fast Retailing had liabilities of JP¥903.2b due within 12 months and liabilities of JP¥627.2b due beyond that. On the other hand, it had cash of JP¥1.63t and JP¥145.2b worth of receivables due within a year. So it actually has JP¥243.0b more liquid assets than total liabilities.

Having regard to Fast Retailing's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥14t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Fast Retailing boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Fast Retailing

Another good sign is that Fast Retailing has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fast Retailing 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Fast Retailing 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. During the last three years, Fast Retailing generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fast Retailing has JP¥1.49t in net cash and a decent-looking balance sheet. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in JP¥460b. So we don't think Fast Retailing's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Fast Retailing, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.