Fuso Dentsu (TSE:7505) Could Easily Take On More 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.' 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. As with many other companies Fuso Dentsu Co., Ltd. (TSE:7505) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fuso Dentsu

How Much Debt Does Fuso Dentsu Carry?

As you can see below, Fuso Dentsu had JP¥400.0m of debt at June 2024, down from JP¥500.0m a year prior. However, its balance sheet shows it holds JP¥9.81b in cash, so it actually has JP¥9.41b net cash.

A Look At Fuso Dentsu's Liabilities

The latest balance sheet data shows that Fuso Dentsu had liabilities of JP¥11.9b due within a year, and liabilities of JP¥4.41b falling due after that. Offsetting this, it had JP¥9.81b in cash and JP¥6.32b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Fuso Dentsu's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥10.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Fuso Dentsu also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Fuso Dentsu has boosted its EBIT by 54%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fuso Dentsu'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fuso Dentsu has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Fuso Dentsu recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fuso Dentsu has JP¥9.41b in net cash. And it impressed us with its EBIT growth of 54% over the last year. So we don't think Fuso Dentsu's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Fuso Dentsu , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.