Subaru (TSE:7270) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Subaru Corporation (TSE:7270) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

We've discovered 3 warning signs about Subaru. View them for free.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

What Is Subaru's Debt?

As you can see below, at the end of December 2024, Subaru had JP¥397.5b of debt, up from JP¥353.1b a year ago. Click the image for more detail. However, it does have JP¥1.97t in cash offsetting this, leading to net cash of JP¥1.57t.

A Look At Subaru's Liabilities

According to the last reported balance sheet, Subaru had liabilities of JP¥1.21t due within 12 months, and liabilities of JP¥1.07t due beyond 12 months. Offsetting this, it had JP¥1.97t in cash and JP¥410.9b in receivables that were due within 12 months. So it can boast JP¥98.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Subaru could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Subaru has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Subaru

The good news is that Subaru has increased its EBIT by 8.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Subaru 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Subaru 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 last three years, Subaru recorded free cash flow worth a fulsome 87% 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 it is always sensible to investigate a company's debt, in this case Subaru has JP¥1.57t in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in JP¥360b. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Subaru (of which 1 doesn't sit too well with us!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.