Japan Elevator Service HoldingsLtd (TSE:6544) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Japan Elevator Service Holdings Co.,Ltd. (TSE:6544) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Japan Elevator Service HoldingsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Japan Elevator Service HoldingsLtd had JP¥7.31b of debt in June 2025, down from JP¥8.61b, one year before. However, it does have JP¥2.96b in cash offsetting this, leading to net debt of about JP¥4.35b.

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

We can see from the most recent balance sheet that Japan Elevator Service HoldingsLtd had liabilities of JP¥13.6b falling due within a year, and liabilities of JP¥2.64b due beyond that. Offsetting these obligations, it had cash of JP¥2.96b as well as receivables valued at JP¥6.45b due within 12 months. So its liabilities total JP¥6.85b more than the combination of its cash and short-term receivables.

Since publicly traded Japan Elevator Service HoldingsLtd shares are worth a total of JP¥329.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Japan Elevator Service HoldingsLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Japan Elevator Service HoldingsLtd

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). 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 has a low net debt to EBITDA ratio of only 0.39. And its EBIT easily covers its interest expense, being 214 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also positive, Japan Elevator Service HoldingsLtd grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Japan Elevator Service HoldingsLtd can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Japan Elevator Service HoldingsLtd's free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Japan Elevator Service HoldingsLtd's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. 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.

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.

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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.