Does Suzuki Motor (TSE:7269) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Suzuki Motor Corporation (TSE:7269) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Suzuki Motor

How Much Debt Does Suzuki Motor Carry?

The chart below, which you can click on for greater detail, shows that Suzuki Motor had JP¥757.1b in debt in September 2024; about the same as the year before. But it also has JP¥930.4b in cash to offset that, meaning it has JP¥173.2b net cash.

A Look At Suzuki Motor's Liabilities

We can see from the most recent balance sheet that Suzuki Motor had liabilities of JP¥1.52t falling due within a year, and liabilities of JP¥772.6b due beyond that. Offsetting these obligations, it had cash of JP¥930.4b as well as receivables valued at JP¥559.8b due within 12 months. So its liabilities total JP¥803.9b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Suzuki Motor has a huge market capitalization of JP¥3.36t, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Suzuki Motor boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Suzuki Motor has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Suzuki Motor 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Suzuki 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. In the last three years, Suzuki Motor's free cash flow amounted to 22% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Suzuki Motor'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¥173.2b. And it impressed us with its EBIT growth of 37% over the last year. So we don't have any problem with Suzuki Motor's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Suzuki Motor's earnings per share history for free.

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.

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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.