Feedforce Group (TSE:7068) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Feedforce Group Inc. (TSE:7068) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Feedforce Group

What Is Feedforce Group's Net Debt?

The image below, which you can click on for greater detail, shows that Feedforce Group had debt of JP¥1.62b at the end of November 2023, a reduction from JP¥2.38b over a year. However, its balance sheet shows it holds JP¥2.80b in cash, so it actually has JP¥1.18b net cash.

How Strong Is Feedforce Group's Balance Sheet?

We can see from the most recent balance sheet that Feedforce Group had liabilities of JP¥2.72b falling due within a year, and liabilities of JP¥1.29b due beyond that. Offsetting these obligations, it had cash of JP¥2.80b as well as receivables valued at JP¥1.66b due within 12 months. So it can boast JP¥457.0m more liquid assets than total liabilities.

This surplus suggests that Feedforce Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Feedforce Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Feedforce Group grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Feedforce Group 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Feedforce Group 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, Feedforce Group produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Feedforce Group has net cash of JP¥1.18b, as well as more liquid assets than liabilities. And we liked the look of last year's 54% year-on-year EBIT growth. So we don't think Feedforce Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Feedforce Group (2 are concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.