Is Kyushu Electric Power Company (TSE:9508) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Kyushu Electric Power Company, Incorporated (TSE:9508) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Kyushu Electric Power Company Carry?

As you can see below, Kyushu Electric Power Company had JP¥3.36t of debt at March 2025, down from JP¥3.77t a year prior. However, because it has a cash reserve of JP¥362.6b, its net debt is less, at about JP¥3.00t.

A Look At Kyushu Electric Power Company's Liabilities

Zooming in on the latest balance sheet data, we can see that Kyushu Electric Power Company had liabilities of JP¥1.07t due within 12 months and liabilities of JP¥3.67t due beyond that. Offsetting these obligations, it had cash of JP¥362.6b as well as receivables valued at JP¥258.6b due within 12 months. So its liabilities total JP¥4.12t more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the JP¥585.0b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Kyushu Electric Power Company would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for Kyushu Electric Power Company

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.

While Kyushu Electric Power Company's debt to EBITDA ratio of 6.7 suggests a heavy debt load, its interest coverage of 9.2 implies it services that debt with ease. Our best guess is that the company does indeed have significant debt obligations. Shareholders should be aware that Kyushu Electric Power Company's EBIT was down 22% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Kyushu Electric Power Company'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.

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. During the last two years, Kyushu Electric Power Company produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

To be frank both Kyushu 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 converting EBIT to free cash flow; that's encouraging. We should also note that Electric Utilities industry companies like Kyushu Electric Power Company commonly do use debt without problems. Overall, it seems to us that Kyushu Electric Power Company'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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Kyushu Electric Power Company (including 1 which is potentially serious) .

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.