Mabuchi Motor (TSE:6592) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Mabuchi Motor Co., Ltd. (TSE:6592) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Mabuchi Motor

What Is Mabuchi Motor's Net Debt?

The image below, which you can click on for greater detail, shows that Mabuchi Motor had debt of JP¥711.0m at the end of June 2024, a reduction from JP¥1.03b over a year. But on the other hand it also has JP¥126.3b in cash, leading to a JP¥125.5b net cash position.

How Strong Is Mabuchi Motor's Balance Sheet?

We can see from the most recent balance sheet that Mabuchi Motor had liabilities of JP¥26.3b falling due within a year, and liabilities of JP¥6.94b due beyond that. Offsetting this, it had JP¥126.3b in cash and JP¥37.3b in receivables that were due within 12 months. So it can boast JP¥130.2b more liquid assets than total liabilities.

This surplus liquidity suggests that Mabuchi Motor's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Mabuchi Motor boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Mabuchi Motor grew its EBIT by 86% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Mabuchi Motor'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Mabuchi 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. Over the most recent three years, Mabuchi Motor recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Mabuchi Motor has JP¥125.5b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 86% over the last year. The bottom line is that we do not find Mabuchi Motor's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Mabuchi Motor (including 1 which is potentially serious) .

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.