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, Maruti Suzuki India Limited (NSE:MARUTI) does carry debt. But the real question is whether this debt is making the company risky.
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. 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 Maruti Suzuki India's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Maruti Suzuki India had debt of ₹4.15b, up from ₹2.49b in one year. But it also has ₹14.6b in cash to offset that, meaning it has ₹10.4b net cash.
How Healthy Is Maruti Suzuki India's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Maruti Suzuki India had liabilities of ₹122.7b due within 12 months and liabilities of ₹27.5b due beyond that. On the other hand, it had cash of ₹14.6b and ₹27.8b worth of receivables due within a year. So it has liabilities totalling ₹107.9b more than its cash and near-term receivables, combined.
Since publicly traded Maruti Suzuki India shares are worth a very impressive total of ₹2.16t, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Maruti Suzuki India boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Maruti Suzuki India's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Maruti Suzuki India 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 Maruti Suzuki India 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. Looking at the most recent three years, Maruti Suzuki India recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Maruti Suzuki India has ₹10.4b in net cash. So we are not troubled with Maruti Suzuki India's debt use. 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 Maruti Suzuki India's earnings per share history for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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