Chugai Mining (TSE:1491) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Chugai Mining Co., Ltd. (TSE:1491) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Chugai Mining's Debt?

As you can see below, at the end of June 2025, Chugai Mining had JP¥2.91b of debt, up from JP¥2.01b a year ago. Click the image for more detail. But on the other hand it also has JP¥3.52b in cash, leading to a JP¥610.0m net cash position.

A Look At Chugai Mining's Liabilities

The latest balance sheet data shows that Chugai Mining had liabilities of JP¥6.57b due within a year, and liabilities of JP¥1.40b falling due after that. On the other hand, it had cash of JP¥3.52b and JP¥793.0m worth of receivables due within a year. So its liabilities total JP¥3.65b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Chugai Mining has a market capitalization of JP¥17.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Chugai Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Chugai Mining

Better yet, Chugai Mining grew its EBIT by 127% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chugai Mining will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Chugai Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Chugai Mining recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although Chugai Mining's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥610.0m. And we liked the look of last year's 127% year-on-year EBIT growth. So we don't have any problem with Chugai Mining's use of debt. 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 Chugai Mining is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.