Is Subaru (TSE:7270) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Subaru Corporation (TSE:7270) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Subaru

What Is Subaru's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Subaru had debt of JP¥390.5b, up from JP¥310.2b in one year. However, it does have JP¥1.91t in cash offsetting this, leading to net cash of JP¥1.52t.

How Healthy Is Subaru's Balance Sheet?

We can see from the most recent balance sheet that Subaru had liabilities of JP¥1.27t falling due within a year, and liabilities of JP¥1.03t due beyond that. Offsetting this, it had JP¥1.91t in cash and JP¥392.4b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Subaru's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥1.91t company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Subaru has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Subaru has boosted its EBIT by 50%, 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 Subaru's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Subaru 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. Over the last three years, Subaru recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Subaru has net cash of JP¥1.52t, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥378b, being 91% of its EBIT. So is Subaru's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Subaru (of which 1 is concerning!) you should know about.

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.