We Think Japan Airlines (TSE:9201) Can Stay On Top Of Its Debt

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. Importantly, Japan Airlines Co., Ltd. (TSE:9201) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Japan Airlines Carry?

As you can see below, Japan Airlines had JP¥886.8b of debt at September 2025, down from JP¥931.9b a year prior. However, its balance sheet shows it holds JP¥949.7b in cash, so it actually has JP¥62.9b net cash.

How Healthy Is Japan Airlines' Balance Sheet?

We can see from the most recent balance sheet that Japan Airlines had liabilities of JP¥914.9b falling due within a year, and liabilities of JP¥890.4b due beyond that. Offsetting these obligations, it had cash of JP¥949.7b as well as receivables valued at JP¥229.6b due within 12 months. So it has liabilities totalling JP¥626.1b more than its cash and near-term receivables, combined.

Japan Airlines has a market capitalization of JP¥1.27t, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Japan Airlines also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Japan Airlines

Another good sign is that Japan Airlines has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Japan Airlines 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Japan Airlines has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Japan Airlines generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Japan Airlines's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥62.9b. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in JP¥137b. So is Japan Airlines's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Japan Airlines that you should be aware of before investing here.

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.