Here's Why Mazda Motor (TSE:7261) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Mazda Motor Corporation (TSE:7261) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mazda Motor

How Much Debt Does Mazda Motor Carry?

As you can see below, Mazda Motor had JP¥558.9b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥948.7b in cash, leading to a JP¥389.8b net cash position.

How Strong Is Mazda Motor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mazda Motor had liabilities of JP¥1.49t due within 12 months and liabilities of JP¥583.7b due beyond that. Offsetting these obligations, it had cash of JP¥948.7b as well as receivables valued at JP¥157.5b due within 12 months. So it has liabilities totalling JP¥969.9b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's JP¥776.9b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Mazda Motor boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

In addition to that, we're happy to report that Mazda Motor has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mazda Motor's ability to maintain a healthy balance sheet going forward. 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. Mazda Motor 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. During the last three years, Mazda Motor produced sturdy free cash flow equating to 77% 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 Mazda Motor does have more liabilities than liquid assets, it also has net cash of JP¥389.8b. And we liked the look of last year's 41% year-on-year EBIT growth. So we are not troubled with Mazda Motor's debt use. 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. For instance, we've identified 2 warning signs for Mazda Motor (1 doesn't sit too well with us) you should be aware of.

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.