These 4 Measures Indicate That Mabuchi Motor (TSE:6592) Is Using Debt Safely

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. Importantly, Mabuchi Motor Co., Ltd. (TSE:6592) 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Mabuchi Motor had JP¥830.0m of debt in March 2024, down from JP¥1.14b, one year before. But on the other hand it also has JP¥117.5b in cash, leading to a JP¥116.7b net cash position.

How Strong Is Mabuchi Motor's Balance Sheet?

According to the last reported balance sheet, Mabuchi Motor had liabilities of JP¥22.4b due within 12 months, and liabilities of JP¥7.19b due beyond 12 months. Offsetting these obligations, it had cash of JP¥117.5b as well as receivables valued at JP¥34.1b due within 12 months. So it can boast JP¥122.0b more liquid assets than total liabilities.

This luscious liquidity implies that Mabuchi Motor's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Mabuchi Motor has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Mabuchi Motor grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mabuchi Motor 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. Mabuchi Motor 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 most recent three years, Mabuchi Motor recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mabuchi Motor has JP¥116.7b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 79% over the last year. So we don't think Mabuchi Motor's use of debt is risky. 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 2 warning signs for Mabuchi Motor (of which 1 is a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.