Is MRT (TSE:6034) Using Too Much Debt?

Simply Wall St · 04/15 21:15

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies MRT Inc. (TSE:6034) makes use of debt. But is this debt a concern to shareholders?

We've discovered 2 warning signs about MRT. View them for free.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is MRT's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 MRT had debt of JP¥551.0m, up from JP¥475.0m in one year. But on the other hand it also has JP¥2.61b in cash, leading to a JP¥2.05b net cash position.

debt-equity-history-analysis
TSE:6034 Debt to Equity History April 15th 2025

How Strong Is MRT's Balance Sheet?

According to the last reported balance sheet, MRT had liabilities of JP¥1.27b due within 12 months, and liabilities of JP¥847.0m due beyond 12 months. Offsetting this, it had JP¥2.61b in cash and JP¥486.0m in receivables that were due within 12 months. So it can boast JP¥974.0m more liquid assets than total liabilities.

It's good to see that MRT has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that MRT has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since MRT will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for MRT

Over 12 months, MRT made a loss at the EBIT level, and saw its revenue drop to JP¥4.2b, which is a fall of 23%. That makes us nervous, to say the least.

So How Risky Is MRT?

Although MRT had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥431m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for MRT (1 can't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.