Here's Why Nippon Yusen Kabushiki Kaisha (TSE:9101) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Nippon Yusen Kabushiki Kaisha (TSE:9101) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. 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.

How Much Debt Does Nippon Yusen Kabushiki Kaisha Carry?

The image below, which you can click on for greater detail, shows that Nippon Yusen Kabushiki Kaisha had debt of JP¥663.3b at the end of December 2024, a reduction from JP¥757.1b over a year. However, it does have JP¥160.7b in cash offsetting this, leading to net debt of about JP¥502.5b.

A Look At Nippon Yusen Kabushiki Kaisha's Liabilities

Zooming in on the latest balance sheet data, we can see that Nippon Yusen Kabushiki Kaisha had liabilities of JP¥603.0b due within 12 months and liabilities of JP¥863.0b due beyond that. On the other hand, it had cash of JP¥160.7b and JP¥393.2b worth of receivables due within a year. So it has liabilities totalling JP¥912.0b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Nippon Yusen Kabushiki Kaisha has a huge market capitalization of JP¥1.97t, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

See our latest analysis for Nippon Yusen Kabushiki Kaisha

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.

Nippon Yusen Kabushiki Kaisha's net debt is only 1.4 times its EBITDA. And its EBIT covers its interest expense a whopping 57.5 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The good news is that Nippon Yusen Kabushiki Kaisha has increased its EBIT by 9.1% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nippon Yusen Kabushiki Kaisha 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 company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Nippon Yusen Kabushiki Kaisha 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

Nippon Yusen Kabushiki Kaisha's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its level of total liabilities. When we consider the range of factors above, it looks like Nippon Yusen Kabushiki Kaisha is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Nippon Yusen Kabushiki Kaisha is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.