Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Mitsui O.S.K. Lines, Ltd. (TSE:9104) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Mitsui O.S.K. Lines
What Is Mitsui O.S.K. Lines's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Mitsui O.S.K. Lines had debt of JP¥1.24t, up from JP¥1.13t in one year. However, because it has a cash reserve of JP¥117.9b, its net debt is less, at about JP¥1.12t.
How Strong Is Mitsui O.S.K. Lines' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Mitsui O.S.K. Lines had liabilities of JP¥647.3b due within 12 months and liabilities of JP¥1.10t due beyond that. Offsetting this, it had JP¥117.9b in cash and JP¥136.3b in receivables that were due within 12 months. So its liabilities total JP¥1.50t more than the combination of its cash and short-term receivables.
This is a mountain of leverage even relative to its gargantuan market capitalization of JP¥1.77t. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
As it happens Mitsui O.S.K. Lines has a fairly concerning net debt to EBITDA ratio of 5.0 but very strong interest coverage of 1k. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. If Mitsui O.S.K. Lines can keep growing EBIT at last year's rate of 14% over the last year, then it will find its debt load easier to manage. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Mitsui O.S.K. Lines 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 it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Mitsui O.S.K. Lines actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our View
Both Mitsui O.S.K. Lines's ability to to cover its interest expense with its EBIT and its conversion of EBIT to free cash flow gave us comfort that it can handle its debt. In contrast, our confidence was undermined by its apparent struggle handle its debt, based on its EBITDA,. When we consider all the elements mentioned above, it seems to us that Mitsui O.S.K. Lines is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. Be aware that Mitsui O.S.K. Lines is showing 4 warning signs in our investment analysis , and 1 of those is concerning...
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About TSE:9104
Mitsui O.S.K. Lines
Engages in the marine transportation business in Japan and internationally.
Average dividend payer slight.
