Here's Why Mercari (TSE:4385) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Mercari, Inc. (TSE:4385) does use debt in its business. But is this debt a concern to shareholders?

Our free stock report includes 2 warning signs investors should be aware of before investing in Mercari. Read for free now.

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Mercari's Net Debt?

The chart below, which you can click on for greater detail, shows that Mercari had JP¥176.0b in debt in December 2024; about the same as the year before. But it also has JP¥191.2b in cash to offset that, meaning it has JP¥15.2b net cash.

How Strong Is Mercari's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mercari had liabilities of JP¥320.8b due within 12 months and liabilities of JP¥104.5b due beyond that. Offsetting these obligations, it had cash of JP¥191.2b as well as receivables valued at JP¥222.0b due within 12 months. So its liabilities total JP¥12.1b more than the combination of its cash and short-term receivables.

Given Mercari has a market capitalization of JP¥378.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Mercari boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Mercari

Also good is that Mercari grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mercari's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Mercari 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, Mercari burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Mercari's liabilities, but we can be reassured by the fact it has has net cash of JP¥15.2b. And we liked the look of last year's 15% year-on-year EBIT growth. So we are not troubled with Mercari's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Mercari .

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.