Here's Why Kintetsu Group HoldingsLtd (TSE:9041) Has A Meaningful Debt Burden

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kintetsu Group HoldingsLtd

How Much Debt Does Kintetsu Group HoldingsLtd Carry?

The chart below, which you can click on for greater detail, shows that Kintetsu Group HoldingsLtd had JP¥1.21t in debt in September 2024; about the same as the year before. However, it also had JP¥215.4b in cash, and so its net debt is JP¥993.1b.

How Strong Is Kintetsu Group HoldingsLtd's Balance Sheet?

The latest balance sheet data shows that Kintetsu Group HoldingsLtd had liabilities of JP¥731.2b due within a year, and liabilities of JP¥1.10t falling due after that. Offsetting these obligations, it had cash of JP¥215.4b as well as receivables valued at JP¥193.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.42t.

This deficit casts a shadow over the JP¥623.2b 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). 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).

As it happens Kintetsu Group HoldingsLtd has a fairly concerning net debt to EBITDA ratio of 6.1 but very strong interest coverage of 16.3. So either it has access to very cheap long term debt or that interest expense is going to grow! The bad news is that Kintetsu Group HoldingsLtd saw its EBIT decline by 13% over the last year. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kintetsu Group HoldingsLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Kintetsu Group HoldingsLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

On the face of it, Kintetsu Group HoldingsLtd's net debt to EBITDA 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 interest cover is a good sign, and makes us more optimistic. Overall, we think it's fair to say that Kintetsu Group HoldingsLtd has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 .

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.