These 4 Measures Indicate That Chugoku Electric Power (TSE:9504) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that The Chugoku Electric Power Co., Inc. (TSE:9504) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Chugoku Electric Power Carry?

The image below, which you can click on for greater detail, shows that at September 2025 Chugoku Electric Power had debt of JP¥3.33t, up from JP¥3.10t in one year. However, it also had JP¥487.9b in cash, and so its net debt is JP¥2.84t.

How Healthy Is Chugoku Electric Power's Balance Sheet?

The latest balance sheet data shows that Chugoku Electric Power had liabilities of JP¥624.7b due within a year, and liabilities of JP¥3.21t falling due after that. Offsetting this, it had JP¥487.9b in cash and JP¥116.0b in receivables that were due within 12 months. So it has liabilities totalling JP¥3.23t more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥352.3b 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, Chugoku Electric Power would probably need a major re-capitalization if its creditors were to demand repayment.

See our latest analysis for Chugoku Electric Power

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.

Chugoku Electric Power's net debt to EBITDA ratio is 10.0 which suggests rather high debt levels, but its interest cover of 8.3 times suggests the debt is easily serviced. Our best guess is that the company does indeed have significant debt obligations. Importantly, Chugoku Electric Power grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Chugoku Electric Power's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Chugoku Electric Power saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Chugoku Electric Power's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. We should also note that Electric Utilities industry companies like Chugoku Electric Power commonly do use debt without problems. Overall, it seems to us that Chugoku Electric Power's balance sheet is really quite a risk to the business. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Chugoku Electric Power you should be aware of, and 2 of them are significant.

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.