We Think Fuva Brain (TSE:3927) Can Stay On Top Of Its Debt

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. We can see that Fuva Brain Limited (TSE:3927) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Fuva Brain

What Is Fuva Brain's Net Debt?

As you can see below, at the end of December 2024, Fuva Brain had JP¥390.0m of debt, up from JP¥71.0m a year ago. Click the image for more detail. But it also has JP¥1.50b in cash to offset that, meaning it has JP¥1.11b net cash.

How Strong Is Fuva Brain's Balance Sheet?

The latest balance sheet data shows that Fuva Brain had liabilities of JP¥1.87b due within a year, and liabilities of JP¥2.18b falling due after that. On the other hand, it had cash of JP¥1.50b and JP¥622.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.92b.

While this might seem like a lot, it is not so bad since Fuva Brain has a market capitalization of JP¥4.08b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Fuva Brain boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Fuva Brain turned things around in the last 12 months, delivering and EBIT of JP¥157m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fuva Brain will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fuva Brain 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. In the last year, Fuva Brain's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Fuva Brain does have more liabilities than liquid assets, it also has net cash of JP¥1.11b. So we are not troubled with Fuva Brain's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Fuva Brain .

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.