Mitsubishi Motors (TSE:7211) Has A Somewhat Strained Balance Sheet

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.' 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. We can see that Mitsubishi Motors Corporation (TSE:7211) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mitsubishi Motors

What Is Mitsubishi Motors's Net Debt?

The image below, which you can click on for greater detail, shows that Mitsubishi Motors had debt of JP¥377.1b at the end of September 2024, a reduction from JP¥424.5b over a year. However, it does have JP¥569.0b in cash offsetting this, leading to net cash of JP¥191.9b.

How Strong Is Mitsubishi Motors' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mitsubishi Motors had liabilities of JP¥953.9b due within 12 months and liabilities of JP¥328.9b due beyond that. Offsetting this, it had JP¥569.0b in cash and JP¥409.3b in receivables that were due within 12 months. So it has liabilities totalling JP¥304.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mitsubishi Motors has a market capitalization of JP¥672.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Mitsubishi Motors boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Mitsubishi Motors has seen its EBIT plunge 15% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Mitsubishi Motors can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mitsubishi Motors 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. In the last three years, Mitsubishi Motors's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Mitsubishi Motors's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥191.9b. So while Mitsubishi Motors does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Mitsubishi Motors you should be aware of, and 1 of them can't be ignored.

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.