Kawasaki Kisen Kaisha (TSE:9107) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Kawasaki Kisen Kaisha, Ltd. (TSE:9107) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Kawasaki Kisen Kaisha Carry?

As you can see below, Kawasaki Kisen Kaisha had JP¥253.9b of debt at September 2025, down from JP¥271.7b a year prior. But on the other hand it also has JP¥331.7b in cash, leading to a JP¥77.8b net cash position.

How Strong Is Kawasaki Kisen Kaisha's Balance Sheet?

We can see from the most recent balance sheet that Kawasaki Kisen Kaisha had liabilities of JP¥224.0b falling due within a year, and liabilities of JP¥281.0b due beyond that. On the other hand, it had cash of JP¥331.7b and JP¥118.4b worth of receivables due within a year. So its liabilities total JP¥54.9b more than the combination of its cash and short-term receivables.

Given Kawasaki Kisen Kaisha has a market capitalization of JP¥1.36t, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Kawasaki Kisen Kaisha also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Kawasaki Kisen Kaisha

On the other hand, Kawasaki Kisen Kaisha's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Kawasaki Kisen Kaisha's ability to maintain a healthy balance sheet going forward. 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. Kawasaki Kisen Kaisha may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Kawasaki Kisen Kaisha actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Kawasaki Kisen Kaisha's liabilities, but we can be reassured by the fact it has has net cash of JP¥77.8b. The cherry on top was that in converted 270% of that EBIT to free cash flow, bringing in JP¥208b. So we don't have any problem with Kawasaki Kisen Kaisha's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Kawasaki Kisen Kaisha has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.