These 4 Measures Indicate That Mitsui O.S.K. Lines (TSE:9104) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Mitsui O.S.K. Lines, Ltd. (TSE:9104) makes use of debt. But is this debt a concern to shareholders?

Our free stock report includes 3 warning signs investors should be aware of before investing in Mitsui O.S.K. Lines. Read for free now.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Mitsui O.S.K. Lines's Net Debt?

As you can see below, at the end of December 2024, Mitsui O.S.K. Lines had JP¥1.52t of debt, up from JP¥1.19t a year ago. Click the image for more detail. On the flip side, it has JP¥132.9b in cash leading to net debt of about JP¥1.39t.

How Healthy 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¥516.1b due within 12 months and liabilities of JP¥1.50t due beyond that. On the other hand, it had cash of JP¥132.9b and JP¥148.9b worth of receivables due within a year. So its liabilities total JP¥1.74t more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's massive market capitalization of JP¥1.74t, we think shareholders really should watch Mitsui O.S.K. Lines's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

Check out our latest analysis for Mitsui O.S.K. Lines

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.

As it happens Mitsui O.S.K. Lines has a fairly concerning net debt to EBITDA ratio of 5.1 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. It is well worth noting that Mitsui O.S.K. Lines's EBIT shot up like bamboo after rain, gaining 51% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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, Mitsui O.S.K. Lines recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Mitsui O.S.K. Lines's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But we must concede we find its net debt to EBITDA has the opposite effect. Looking at all the aforementioned factors together, it strikes us that Mitsui O.S.K. Lines can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Mitsui O.S.K. Lines (including 2 which are a bit concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.