These 4 Measures Indicate That Feedforce Group (TSE:7068) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Feedforce Group

How Much Debt Does Feedforce Group Carry?

The image below, which you can click on for greater detail, shows that at August 2024 Feedforce Group had debt of JP¥2.12b, up from JP¥1.46b in one year. But it also has JP¥2.97b in cash to offset that, meaning it has JP¥855.0m net cash.

How Healthy Is Feedforce Group's Balance Sheet?

According to the last reported balance sheet, Feedforce Group had liabilities of JP¥2.80b due within 12 months, and liabilities of JP¥1.19b due beyond 12 months. Offsetting these obligations, it had cash of JP¥2.97b as well as receivables valued at JP¥1.57b due within 12 months. So it actually has JP¥553.0m 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. Succinctly put, Feedforce Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Feedforce Group grew its EBIT by 3.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is Feedforce Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Feedforce Group recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Feedforce Group has JP¥855.0m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 3.9% in the last twelve months. So we are not troubled with Feedforce Group'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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Feedforce Group (of which 2 can't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.