Makita (TSE:6586) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Makita Corporation (TSE:6586) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Makita

How Much Debt Does Makita Carry?

You can click the graphic below for the historical numbers, but it shows that Makita had JP¥10.9b of debt in June 2024, down from JP¥124.7b, one year before. But on the other hand it also has JP¥200.8b in cash, leading to a JP¥189.9b net cash position.

How Strong Is Makita's Balance Sheet?

The latest balance sheet data shows that Makita had liabilities of JP¥136.4b due within a year, and liabilities of JP¥35.1b falling due after that. Offsetting these obligations, it had cash of JP¥200.8b as well as receivables valued at JP¥114.2b due within 12 months. So it can boast JP¥143.6b more liquid assets than total liabilities.

This short term liquidity is a sign that Makita could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Makita boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Makita grew its EBIT by 143% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Makita 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Makita 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. During the last three years, Makita produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Makita has JP¥189.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 143% year-on-year EBIT growth. So is Makita's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Makita, you may well want to click here to check an interactive graph of its earnings per share history.

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.