These 4 Measures Indicate That Forval (TSE:8275) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Forval Corporation (TSE:8275) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Forval's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Forval had JP¥2.10b of debt in June 2025, down from JP¥3.88b, one year before. But on the other hand it also has JP¥9.69b in cash, leading to a JP¥7.59b net cash position.

How Healthy Is Forval's Balance Sheet?

We can see from the most recent balance sheet that Forval had liabilities of JP¥13.6b falling due within a year, and liabilities of JP¥3.98b due beyond that. Offsetting these obligations, it had cash of JP¥9.69b as well as receivables valued at JP¥10.1b due within 12 months. So it can boast JP¥2.15b more liquid assets than total liabilities.

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

Check out our latest analysis for Forval

Fortunately, Forval grew its EBIT by 5.0% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Forval's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Forval 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. Over the most recent three years, Forval recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Forval has JP¥7.59b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in JP¥3.3b. So we don't think Forval's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Forval, you may well want to click here to check an interactive graph of its earnings per share history.

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.