These 4 Measures Indicate That Maruti Suzuki India (NSE:MARUTI) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Maruti Suzuki India Limited (NSE:MARUTI) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Maruti Suzuki India

What Is Maruti Suzuki India's Debt?

The image below, which you can click on for greater detail, shows that Maruti Suzuki India had debt of ₹3.82b at the end of March 2022, a reduction from ₹5.08b over a year. But it also has ₹71.4b in cash to offset that, meaning it has ₹67.6b net cash.

A Look At Maruti Suzuki India's Liabilities

Zooming in on the latest balance sheet data, we can see that Maruti Suzuki India had liabilities of ₹170.2b due within 12 months and liabilities of ₹23.0b due beyond that. Offsetting this, it had ₹71.4b in cash and ₹20.7b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹101.1b.

Since publicly traded Maruti Suzuki India shares are worth a very impressive total of ₹2.29t, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Also positive, Maruti Suzuki India grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Maruti Suzuki India 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, Maruti Suzuki India recorded free cash flow worth 54% 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.

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 ₹67.6b. And we liked the look of last year's 23% year-on-year EBIT growth. So is Maruti Suzuki India's debt a risk? It doesn't seem so to us. 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 Maruti Suzuki India , and understanding them should be part of your investment process.

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.