Bunkyodo Group Holdings (TSE:9978) Seems To Be Using A Lot Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Bunkyodo Group Holdings Co., Ltd. (TSE:9978) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Bunkyodo Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that Bunkyodo Group Holdings had debt of JP¥4.13b at the end of November 2024, a reduction from JP¥4.51b over a year. On the flip side, it has JP¥1.39b in cash leading to net debt of about JP¥2.74b.

How Healthy Is Bunkyodo Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Bunkyodo Group Holdings had liabilities of JP¥7.39b falling due within a year, and liabilities of JP¥1.84b due beyond that. Offsetting this, it had JP¥1.39b in cash and JP¥732.0m in receivables that were due within 12 months. So its liabilities total JP¥7.10b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the JP¥1.97b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Bunkyodo Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment.

View our latest analysis for Bunkyodo Group Holdings

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Bunkyodo Group Holdings shareholders face the double whammy of a high net debt to EBITDA ratio (23.5), and fairly weak interest coverage, since EBIT is just 0.86 times the interest expense. The debt burden here is substantial. Another concern for investors might be that Bunkyodo Group Holdings's EBIT fell 14% in the last year. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bunkyodo Group Holdings'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Bunkyodo Group Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, Bunkyodo Group Holdings's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Overall, it seems to us that Bunkyodo Group Holdings's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example, we've discovered 4 warning signs for Bunkyodo Group Holdings (2 don't sit too well with us!) that you should be aware of before investing here.

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.