Does Daihatsu Diesel Mfg (TSE:6023) Have A Healthy 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Daihatsu Diesel Mfg. Co., Ltd. (TSE:6023) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Daihatsu Diesel Mfg

What Is Daihatsu Diesel Mfg's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Daihatsu Diesel Mfg had JP¥12.5b of debt in December 2023, down from JP¥13.6b, one year before. But it also has JP¥30.0b in cash to offset that, meaning it has JP¥17.6b net cash.

How Healthy Is Daihatsu Diesel Mfg's Balance Sheet?

According to the last reported balance sheet, Daihatsu Diesel Mfg had liabilities of JP¥33.0b due within 12 months, and liabilities of JP¥16.4b due beyond 12 months. On the other hand, it had cash of JP¥30.0b and JP¥16.9b worth of receivables due within a year. So it has liabilities totalling JP¥2.45b more than its cash and near-term receivables, combined.

Given Daihatsu Diesel Mfg has a market capitalization of JP¥53.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Daihatsu Diesel Mfg also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Daihatsu Diesel Mfg grew its EBIT by 148% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Daihatsu Diesel Mfg's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Daihatsu Diesel Mfg 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. Happily for any shareholders, Daihatsu Diesel Mfg actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Daihatsu Diesel Mfg has JP¥17.6b in net cash. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in -JP¥139m. So is Daihatsu Diesel Mfg's debt a risk? It doesn't seem so to us. 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 example, we've discovered 3 warning signs for Daihatsu Diesel Mfg that you should be aware of before investing here.

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.