Bridgestone (TSE:5108) Seems To Use Debt Quite Sensibly

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. We note that Bridgestone Corporation (TSE:5108) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Bridgestone

What Is Bridgestone's Net Debt?

As you can see below, at the end of December 2023, Bridgestone had JP¥497.9b of debt, up from JP¥453.5b a year ago. Click the image for more detail. But on the other hand it also has JP¥735.4b in cash, leading to a JP¥237.5b net cash position.

How Strong Is Bridgestone's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bridgestone had liabilities of JP¥1.26t due within 12 months and liabilities of JP¥758.7b due beyond that. On the other hand, it had cash of JP¥735.4b and JP¥952.3b worth of receivables due within a year. So it has liabilities totalling JP¥334.7b more than its cash and near-term receivables, combined.

Of course, Bridgestone has a titanic market capitalization of JP¥4.41t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Bridgestone boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Bridgestone has increased its EBIT by 6.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bridgestone can strengthen its balance sheet over time. 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. Bridgestone 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, Bridgestone recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Bridgestone's liabilities, but we can be reassured by the fact it has has net cash of JP¥237.5b. On top of that, it increased its EBIT by 6.0% in the last twelve months. So we are not troubled with Bridgestone's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Bridgestone .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.