We Think Mazda Motor (TSE:7261) Can Stay On Top Of Its Debt

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.' 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. We note that Mazda Motor Corporation (TSE:7261) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Mazda Motor

How Much Debt Does Mazda Motor Carry?

You can click the graphic below for the historical numbers, but it shows that Mazda Motor had JP¥516.7b of debt in December 2023, down from JP¥699.1b, one year before. But on the other hand it also has JP¥748.9b in cash, leading to a JP¥232.2b net cash position.

How Healthy Is Mazda Motor's Balance Sheet?

We can see from the most recent balance sheet that Mazda Motor had liabilities of JP¥1.30t falling due within a year, and liabilities of JP¥570.5b due beyond that. On the other hand, it had cash of JP¥748.9b and JP¥142.8b worth of receivables due within a year. So its liabilities total JP¥982.4b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of JP¥1.06t, so it does suggest shareholders should keep an eye on Mazda Motor's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Mazda Motor also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Mazda Motor has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mazda Motor 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mazda Motor 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, Mazda Motor recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Mazda Motor does have more liabilities than liquid assets, it also has net cash of JP¥232.2b. And we liked the look of last year's 55% year-on-year EBIT growth. So we are not troubled with Mazda Motor'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 Mazda Motor .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.