Is Murata Manufacturing (TSE:6981) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Murata Manufacturing Co., Ltd. (TSE:6981) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Murata Manufacturing

What Is Murata Manufacturing's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Murata Manufacturing had JP¥53.0b of debt in June 2024, down from JP¥112.2b, one year before. But on the other hand it also has JP¥537.6b in cash, leading to a JP¥484.7b net cash position.

A Look At Murata Manufacturing's Liabilities

According to the last reported balance sheet, Murata Manufacturing had liabilities of JP¥283.9b due within 12 months, and liabilities of JP¥167.7b due beyond 12 months. Offsetting these obligations, it had cash of JP¥537.6b as well as receivables valued at JP¥306.5b due within 12 months. So it can boast JP¥392.5b more liquid assets than total liabilities.

This short term liquidity is a sign that Murata Manufacturing could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Murata Manufacturing has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Murata Manufacturing has increased its EBIT by 8.2% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Murata Manufacturing 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 Murata Manufacturing 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, Murata Manufacturing recorded free cash flow worth 63% 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 we empathize with investors who find debt concerning, you should keep in mind that Murata Manufacturing has net cash of JP¥484.7b, as well as more liquid assets than liabilities. So we don't think Murata Manufacturing's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Murata Manufacturing's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.