Maruti Suzuki India (NSE:MARUTI) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Maruti Suzuki India Limited (NSE:MARUTI) makes use of debt. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Maruti Suzuki India

How Much Debt Does Maruti Suzuki India Carry?

The image below, which you can click on for greater detail, shows that Maruti Suzuki India had debt of ₹1.58b at the end of September 2024, a reduction from ₹3.93b over a year. However, it does have ₹36.4b in cash offsetting this, leading to net cash of ₹34.9b.

How Healthy Is Maruti Suzuki India's Balance Sheet?

According to the last reported balance sheet, Maruti Suzuki India had liabilities of ₹274.3b due within 12 months, and liabilities of ₹51.4b due beyond 12 months. Offsetting this, it had ₹36.4b in cash and ₹59.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹229.9b.

Given Maruti Suzuki India has a humongous market capitalization of ₹3.67t, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Maruti Suzuki India also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Maruti Suzuki India has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Maruti Suzuki India'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. Maruti Suzuki India 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, Maruti Suzuki India recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Maruti Suzuki India's liabilities, but we can be reassured by the fact it has has net cash of ₹34.9b. And it impressed us with its EBIT growth of 27% over the last year. So we don't think Maruti Suzuki India's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Maruti Suzuki India that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.