Is Fuso Dentsu (TSE:7505) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Fuso Dentsu Co., Ltd. (TSE:7505) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Fuso Dentsu's Debt?

The image below, which you can click on for greater detail, shows that Fuso Dentsu had debt of JP¥300.0m at the end of December 2024, a reduction from JP¥400.0m over a year. However, its balance sheet shows it holds JP¥6.87b in cash, so it actually has JP¥6.57b net cash.

How Healthy Is Fuso Dentsu's Balance Sheet?

We can see from the most recent balance sheet that Fuso Dentsu had liabilities of JP¥13.5b falling due within a year, and liabilities of JP¥3.90b due beyond that. Offsetting this, it had JP¥6.87b in cash and JP¥8.65b in receivables that were due within 12 months. So its liabilities total JP¥1.86b more than the combination of its cash and short-term receivables.

Fuso Dentsu has a market capitalization of JP¥9.27b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Fuso Dentsu boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Fuso Dentsu

And we also note warmly that Fuso Dentsu grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. Fuso Dentsu 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, Fuso Dentsu's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Fuso Dentsu does have more liabilities than liquid assets, it also has net cash of JP¥6.57b. And it impressed us with its EBIT growth of 19% over the last year. So we don't have any problem with Fuso Dentsu's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Fuso Dentsu that you should be aware of.

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.