The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, builds no bones about it when he states ‘The hugegest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you necessary to consider debt, when you believe about how risky any given stock is, becautilize too much debt can sink a company. Importantly, Kokusai Electric Corporation (TSE:6525) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 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 necessary capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business utilizes is to view at its cash and debt toreceiveher.
How Much Debt Does Kokusai Electric Carry?
The image below, which you can click on for greater detail, reveals that Kokusai Electric had debt of JP¥52.5b at the finish of September 2025, a reduction from JP¥87.8b over a year. However, it also had JP¥43.8b in cash, and so its net debt is JP¥8.73b.
How Healthy Is Kokusai Electric’s Balance Sheet?
According to the last reported balance sheet, Kokusai Electric had liabilities of JP¥78.1b due within 12 months, and liabilities of JP¥56.9b due beyond 12 months. Offsetting these obligations, it had cash of JP¥43.8b as well as receivables valued at JP¥38.1b due within 12 months. So its liabilities total JP¥53.1b more than the combination of its cash and short-term receivables.
Given Kokusai Electric has a market capitalization of JP¥1.28t, it’s hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommfinish shareholders continue to monitor the balance sheet, going forward. But either way, Kokusai Electric has virtually no net debt, so it’s fair to state it does not have a heavy debt load!
See our latest analysis for Kokusai Electric
We utilize 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Kokusai Electric’s net debt is only 0.15 times its EBITDA. And its EBIT easily covers its interest expense, being 24.1 times the size. So you could argue it is no more threatened by its debt than an elephant is by a moutilize. The good news is that Kokusai Electric has increased its EBIT by 3.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kokusai Electric’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals believe, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lfinishers only accept cold hard cash. So we clearly necessary to view at whether that EBIT is leading to corresponding free cash flow. In the last three years, Kokusai Electric’s free cash flow amounted to 21% of its EBIT, less than we’d expect. That’s not great, when it comes to paying down debt.
Our View
The good news is that Kokusai Electric’s demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that Kokusai Electric can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it’s worth monitoring the balance sheet. 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 finish, you should be aware of the 1 warning sign we’ve spotted with Kokusai Electric .
When all is declared and done, sometimes its simpler to focus on companies that don’t even necessary debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Valuation is complex, but we’re here to simplify it.
Discover if Kokusai Electric might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividfinishs, insider trades, and its financial condition.
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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 applying an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to purchase or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focutilized 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.
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