Here's Why SuzukiLtd (TSE:6785) Can Manage Its Debt Responsibly

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, Suzuki Co.,Ltd. (TSE:6785) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SuzukiLtd

What Is SuzukiLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SuzukiLtd had JP¥2.95b of debt in March 2024, down from JP¥3.83b, one year before. However, its balance sheet shows it holds JP¥5.98b in cash, so it actually has JP¥3.03b net cash.

How Strong Is SuzukiLtd's Balance Sheet?

The latest balance sheet data shows that SuzukiLtd had liabilities of JP¥9.07b due within a year, and liabilities of JP¥2.63b falling due after that. On the other hand, it had cash of JP¥5.98b and JP¥5.96b worth of receivables due within a year. So it can boast JP¥245.0m more liquid assets than total liabilities.

This state of affairs indicates that SuzukiLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥18.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, SuzukiLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, SuzukiLtd saw its EBIT drop by 6.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SuzukiLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SuzukiLtd 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. In the last three years, SuzukiLtd's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SuzukiLtd has net cash of JP¥3.03b, as well as more liquid assets than liabilities. So we don't have any problem with SuzukiLtd's use of debt. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check SuzukiLtd's dividend history, without delay!

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.