Does Mitsubishi Electric (TSE:6503) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Mitsubishi Electric Corporation (TSE:6503) makes use of debt. But is this debt a concern to shareholders?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Mitsubishi Electric's Debt?

The image below, which you can click on for greater detail, shows that Mitsubishi Electric had debt of JP¥212.8b at the end of March 2025, a reduction from JP¥241.3b over a year. However, it does have JP¥757.3b in cash offsetting this, leading to net cash of JP¥544.5b.

A Look At Mitsubishi Electric's Liabilities

According to the last reported balance sheet, Mitsubishi Electric had liabilities of JP¥1.85t due within 12 months, and liabilities of JP¥452.3b due beyond 12 months. Offsetting this, it had JP¥757.3b in cash and JP¥1.49t in receivables that were due within 12 months. So its liabilities total JP¥51.7b more than the combination of its cash and short-term receivables.

Having regard to Mitsubishi Electric's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥6.03t company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Mitsubishi Electric also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Mitsubishi Electric

And we also note warmly that Mitsubishi Electric grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mitsubishi Electric's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Mitsubishi Electric may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Mitsubishi Electric's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Mitsubishi Electric's liabilities, but we can be reassured by the fact it has has net cash of JP¥544.5b. And it impressed us with its EBIT growth of 19% over the last year. So is Mitsubishi Electric's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Mitsubishi Electric , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.