We Think Fujitsu (TSE:6702) Can Stay On Top Of Its Debt

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.' 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. We note that Fujitsu Limited (TSE:6702) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Fujitsu

What Is Fujitsu's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Fujitsu had debt of JP¥285.9b, up from JP¥221.9b in one year. However, it does have JP¥356.7b in cash offsetting this, leading to net cash of JP¥70.8b.

How Strong Is Fujitsu's Balance Sheet?

We can see from the most recent balance sheet that Fujitsu had liabilities of JP¥1.21t falling due within a year, and liabilities of JP¥266.4b due beyond that. On the other hand, it had cash of JP¥356.7b and JP¥628.0b worth of receivables due within a year. So its liabilities total JP¥496.8b more than the combination of its cash and short-term receivables.

Since publicly traded Fujitsu shares are worth a very impressive total of JP¥4.80t, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Fujitsu also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Fujitsu grew its EBIT at 19% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Fujitsu 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 company can only pay off debt with cold hard cash, not accounting profits. Fujitsu 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 three years, Fujitsu's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Fujitsu's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥70.8b. And we liked the look of last year's 19% year-on-year EBIT growth. So we are not troubled with Fujitsu's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Fujitsu , and understanding them should be part of your investment process.

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. 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.