Does Kintetsu Group HoldingsLtd (TSE:9041) Have A Healthy Balance Sheet?

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 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. We note that Kintetsu Group Holdings Co.,Ltd. (TSE:9041) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kintetsu Group HoldingsLtd

What Is Kintetsu Group HoldingsLtd's Debt?

The chart below, which you can click on for greater detail, shows that Kintetsu Group HoldingsLtd had JP¥1.26t in debt in December 2024; about the same as the year before. On the flip side, it has JP¥269.6b in cash leading to net debt of about JP¥990.0b.

How Healthy Is Kintetsu Group HoldingsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kintetsu Group HoldingsLtd had liabilities of JP¥744.3b due within 12 months and liabilities of JP¥1.13t due beyond that. On the other hand, it had cash of JP¥269.6b and JP¥200.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.41t.

This deficit casts a shadow over the JP¥652.5b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Kintetsu Group HoldingsLtd would likely require a major re-capitalisation if it had to pay its creditors today.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

As it happens Kintetsu Group HoldingsLtd has a fairly concerning net debt to EBITDA ratio of 5.8 but very strong interest coverage of 16.1. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. Sadly, Kintetsu Group HoldingsLtd's EBIT actually dropped 3.9% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Kintetsu Group HoldingsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Kintetsu Group HoldingsLtd generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

To be frank both Kintetsu Group HoldingsLtd's net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Kintetsu Group HoldingsLtd stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Kintetsu Group HoldingsLtd .

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.