Murata Manufacturing (TSE:6981) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Murata Manufacturing Co., Ltd. (TSE:6981) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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

How Much Debt Does Murata Manufacturing Carry?

The image below, which you can click on for greater detail, shows that Murata Manufacturing had debt of JP¥3.23b at the end of September 2024, a reduction from JP¥112.5b over a year. However, its balance sheet shows it holds JP¥571.7b in cash, so it actually has JP¥568.5b net cash.

A Look At Murata Manufacturing's Liabilities

Zooming in on the latest balance sheet data, we can see that Murata Manufacturing had liabilities of JP¥259.2b due within 12 months and liabilities of JP¥163.3b due beyond that. Offsetting this, it had JP¥571.7b in cash and JP¥311.6b in receivables that were due within 12 months. So it can boast JP¥460.8b more liquid assets than total liabilities.

This surplus suggests that Murata Manufacturing has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Murata Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Murata Manufacturing grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 65% 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 Murata Manufacturing has JP¥568.5b in net cash and a decent-looking balance sheet. So is Murata Manufacturing's debt a risk? It doesn't seem so to us. 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.

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.

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.