Is Japan Elevator Service HoldingsLtd (TSE:6544) Using Too Much Debt?

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.' 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. We can see that Japan Elevator Service Holdings Co.,Ltd. (TSE:6544) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Japan Elevator Service HoldingsLtd's Debt?

As you can see below, Japan Elevator Service HoldingsLtd had JP¥5.00b of debt at March 2025, down from JP¥6.71b a year prior. However, it does have JP¥2.34b in cash offsetting this, leading to net debt of about JP¥2.66b.

How Strong Is Japan Elevator Service HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, Japan Elevator Service HoldingsLtd had liabilities of JP¥12.3b due within 12 months, and liabilities of JP¥2.83b due beyond 12 months. Offsetting these obligations, it had cash of JP¥2.34b as well as receivables valued at JP¥7.25b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥5.50b.

This state of affairs indicates that Japan Elevator Service HoldingsLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥358.8b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Japan Elevator Service HoldingsLtd has a very light debt load indeed.

See our latest analysis for Japan Elevator Service HoldingsLtd

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Japan Elevator Service HoldingsLtd's net debt is only 0.25 times its EBITDA. And its EBIT covers its interest expense a whopping 221 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Another good sign is that Japan Elevator Service HoldingsLtd has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Japan Elevator Service HoldingsLtd'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. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Japan Elevator Service HoldingsLtd's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that Japan Elevator Service HoldingsLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Looking at the bigger picture, we think Japan Elevator Service HoldingsLtd's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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 Japan Elevator Service HoldingsLtd's earnings per share history for free.

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.

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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.