Is Nippon Ski Resort DevelopmentLtd (TSE:6040) Using Too Much Debt?

Warren Buffett famously said, '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. We note that Nippon Ski Resort Development Co.,Ltd. (TSE:6040) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Nippon Ski Resort DevelopmentLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Nippon Ski Resort DevelopmentLtd had JP¥3.13b in debt in January 2025; about the same as the year before. However, it does have JP¥2.00b in cash offsetting this, leading to net debt of about JP¥1.13b.

How Healthy Is Nippon Ski Resort DevelopmentLtd's Balance Sheet?

According to the last reported balance sheet, Nippon Ski Resort DevelopmentLtd had liabilities of JP¥3.06b due within 12 months, and liabilities of JP¥2.35b due beyond 12 months. Offsetting these obligations, it had cash of JP¥2.00b as well as receivables valued at JP¥1.55b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.87b.

Given Nippon Ski Resort DevelopmentLtd has a market capitalization of JP¥16.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

Check out our latest analysis for Nippon Ski Resort DevelopmentLtd

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Nippon Ski Resort DevelopmentLtd has a low net debt to EBITDA ratio of only 0.41. And its EBIT easily covers its interest expense, being 71.6 times the size. So we're pretty relaxed about its super-conservative use of debt. On top of that, Nippon Ski Resort DevelopmentLtd grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. 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 Nippon Ski Resort DevelopmentLtd 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 .

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Nippon Ski Resort DevelopmentLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

The good news is that Nippon Ski Resort DevelopmentLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that Nippon Ski Resort DevelopmentLtd can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Nippon Ski Resort DevelopmentLtd (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.