AGORA Hospitality Group (TSE:9704) Has A Somewhat Strained Balance Sheet

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.' 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. We can see that AGORA Hospitality Group Co., Ltd (TSE:9704) does use debt in its business. But should shareholders be worried about its use of debt?

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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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does AGORA Hospitality Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 AGORA Hospitality Group had JP¥9.12b of debt, an increase on JP¥8.66b, over one year. However, because it has a cash reserve of JP¥3.27b, its net debt is less, at about JP¥5.85b.

How Strong Is AGORA Hospitality Group's Balance Sheet?

We can see from the most recent balance sheet that AGORA Hospitality Group had liabilities of JP¥4.99b falling due within a year, and liabilities of JP¥8.41b due beyond that. Offsetting these obligations, it had cash of JP¥3.27b as well as receivables valued at JP¥618.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥9.52b.

This deficit isn't so bad because AGORA Hospitality Group is worth JP¥16.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

See our latest analysis for AGORA Hospitality Group

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).

AGORA Hospitality Group has a debt to EBITDA ratio of 5.0 and its EBIT covered its interest expense 5.9 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Notably, AGORA Hospitality Group's EBIT launched higher than Elon Musk, gaining a whopping 316% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AGORA Hospitality Group 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 two years, AGORA Hospitality Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

AGORA Hospitality Group's conversion of EBIT to free cash flow and net debt to EBITDA definitely weigh on it, in our esteem. But the good news is it seems to be able to grow its EBIT with ease. Taking the abovementioned factors together we do think AGORA Hospitality Group's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that AGORA Hospitality Group is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.