We Think Car Mate Mfg (TYO:7297) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Car Mate Mfg. Co., Ltd. (TYO:7297) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Car Mate Mfg

What Is Car Mate Mfg's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Car Mate Mfg had JP¥1.42b of debt in September 2020, down from JP¥1.57b, one year before. But on the other hand it also has JP¥7.80b in cash, leading to a JP¥6.38b net cash position.

How Healthy Is Car Mate Mfg's Balance Sheet?

We can see from the most recent balance sheet that Car Mate Mfg had liabilities of JP¥3.10b falling due within a year, and liabilities of JP¥2.54b due beyond that. Offsetting these obligations, it had cash of JP¥7.80b as well as receivables valued at JP¥2.39b due within 12 months. So it actually has JP¥4.56b more liquid assets than total liabilities.

This surplus strongly suggests that Car Mate Mfg has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Car Mate Mfg boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Car Mate Mfg's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Car Mate Mfg will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Car Mate Mfg 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. During the last three years, Car Mate Mfg produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Car Mate Mfg has JP¥6.38b in net cash and a decent-looking balance sheet. So we don't think Car Mate Mfg's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Car Mate Mfg you should be aware of.

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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