Fushiki Kairiku UnsoLtd (TSE:9361) Takes On Some Risk With Its Use Of 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.' 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. As with many other companies Fushiki Kairiku Unso Co.,Ltd. (TSE:9361) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Fushiki Kairiku UnsoLtd Carry?

As you can see below, Fushiki Kairiku UnsoLtd had JP¥5.72b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had JP¥2.46b in cash, and so its net debt is JP¥3.26b.

How Strong Is Fushiki Kairiku UnsoLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fushiki Kairiku UnsoLtd had liabilities of JP¥3.96b due within 12 months and liabilities of JP¥6.45b due beyond that. Offsetting these obligations, it had cash of JP¥2.46b as well as receivables valued at JP¥2.49b due within 12 months. So its liabilities total JP¥5.47b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of JP¥3.88b, we think shareholders really should watch Fushiki Kairiku UnsoLtd's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

Check out our latest analysis for Fushiki Kairiku UnsoLtd

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

We'd say that Fushiki Kairiku UnsoLtd's moderate net debt to EBITDA ratio ( being 1.9), indicates prudence when it comes to debt. And its strong interest cover of 1k times, makes us even more comfortable. Unfortunately, Fushiki Kairiku UnsoLtd's EBIT flopped 12% over the last four quarters. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fushiki Kairiku UnsoLtd's earnings that will influence how the balance sheet holds up in the future. 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Fushiki Kairiku UnsoLtd recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

We'd go so far as to say Fushiki Kairiku UnsoLtd's level of total liabilities was disappointing. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. We should also note that Infrastructure industry companies like Fushiki Kairiku UnsoLtd commonly do use debt without problems. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Fushiki Kairiku UnsoLtd stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Fushiki Kairiku UnsoLtd that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.