Here's Why Hankyu Hanshin Holdings (TSE:9042) Has A Meaningful Debt Burden

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. As with many other companies Hankyu Hanshin Holdings, Inc. (TSE:9042) makes use of debt. But the more important question is: how much risk is that debt creating?

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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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Hankyu Hanshin Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Hankyu Hanshin Holdings had debt of JP¥1.30t, up from JP¥1.19t in one year. On the flip side, it has JP¥57.5b in cash leading to net debt of about JP¥1.25t.

How Healthy Is Hankyu Hanshin Holdings' Balance Sheet?

According to the last reported balance sheet, Hankyu Hanshin Holdings had liabilities of JP¥503.8b due within 12 months, and liabilities of JP¥1.62t due beyond 12 months. Offsetting this, it had JP¥57.5b in cash and JP¥82.8b in receivables that were due within 12 months. So its liabilities total JP¥1.98t more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the JP¥1.06t 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, Hankyu Hanshin Holdings would probably need a major re-capitalization if its creditors were to demand repayment.

View our latest analysis for Hankyu Hanshin Holdings

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 Hankyu Hanshin Holdings has a fairly concerning net debt to EBITDA ratio of 6.5 but very strong interest coverage of 11.8. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. One way Hankyu Hanshin Holdings could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 18%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hankyu Hanshin Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Considering the last three years, Hankyu Hanshin Holdings actually recorded a cash outflow, overall. 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.

Our View

To be frank both Hankyu Hanshin Holdings'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. We're quite clear that we consider Hankyu Hanshin Holdings 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Hankyu Hanshin Holdings (1 is concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.