Chubu Electric Power Company (TSE:9502) Seems To Be Using A Lot Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Chubu Electric Power Company, Incorporated (TSE:9502) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Chubu Electric Power Company Carry?

As you can see below, Chubu Electric Power Company had JP¥3.07t of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. However, it also had JP¥293.5b in cash, and so its net debt is JP¥2.77t.

A Look At Chubu Electric Power Company's Liabilities

According to the last reported balance sheet, Chubu Electric Power Company had liabilities of JP¥1.26t due within 12 months, and liabilities of JP¥3.01t due beyond 12 months. On the other hand, it had cash of JP¥293.5b and JP¥311.1b worth of receivables due within a year. So it has liabilities totalling JP¥3.66t more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥1.37t company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Chubu Electric Power Company would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for Chubu Electric Power Company

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely Chubu Electric Power Company has a sky high EBITDA ratio of 6.7, implying high debt, but a strong interest coverage of 10.9. So either it has access to very cheap long term debt or that interest expense is going to grow! Importantly, Chubu Electric Power Company's EBIT fell a jaw-dropping 30% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Chubu Electric Power Company 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 it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Chubu Electric Power Company's free cash flow amounted to 25% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

To be frank both Chubu Electric Power Company's EBIT growth rate 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 should also note that Electric Utilities industry companies like Chubu Electric Power Company commonly do use debt without problems. After considering the datapoints discussed, we think Chubu Electric Power Company has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. To that end, you should learn about the 4 warning signs we've spotted with Chubu Electric Power Company (including 2 which shouldn't be ignored) .

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.