These 4 Measures Indicate That Yamato Mobility & Mfg.Ltd (TSE:7886) Is Using Debt Extensively

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.' 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 Yamato Mobility & Mfg. Co.,Ltd. (TSE:7886) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Yamato Mobility & Mfg.Ltd's Debt?

As you can see below, Yamato Mobility & Mfg.Ltd had JP¥3.04b of debt at June 2025, down from JP¥3.31b a year prior. However, because it has a cash reserve of JP¥1.70b, its net debt is less, at about JP¥1.35b.

A Look At Yamato Mobility & Mfg.Ltd's Liabilities

We can see from the most recent balance sheet that Yamato Mobility & Mfg.Ltd had liabilities of JP¥2.99b falling due within a year, and liabilities of JP¥2.46b due beyond that. Offsetting these obligations, it had cash of JP¥1.70b as well as receivables valued at JP¥2.13b due within 12 months. So its liabilities total JP¥1.63b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the JP¥1.06b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Yamato Mobility & Mfg.Ltd would probably need a major re-capitalization if its creditors were to demand repayment.

Check out our latest analysis for Yamato Mobility & Mfg.Ltd

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While we wouldn't worry about Yamato Mobility & Mfg.Ltd's net debt to EBITDA ratio of 4.5, we think its super-low interest cover of 0.38 times is a sign of high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Even worse, Yamato Mobility & Mfg.Ltd saw its EBIT tank 89% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yamato Mobility & Mfg.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Yamato Mobility & Mfg.Ltd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, Yamato Mobility & Mfg.Ltd's interest cover left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We're quite clear that we consider Yamato Mobility & Mfg.Ltd to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Yamato Mobility & Mfg.Ltd you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.