Nasdaq
華爾街日報Here's Why Chubu Electric Power Company (TSE:9502) Has A Meaningful Debt Burden
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Chubu Electric Power Company, Incorporated (TSE:9502) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Chubu Electric Power Company's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2025 Chubu Electric Power Company had debt of JP¥3.28t, up from JP¥3.11t in one year. However, it does have JP¥436.7b in cash offsetting this, leading to net debt of about JP¥2.84t.
How Strong Is Chubu Electric Power Company's Balance Sheet?
The latest balance sheet data shows that Chubu Electric Power Company had liabilities of JP¥1.20t due within a year, and liabilities of JP¥3.23t falling due after that. On the other hand, it had cash of JP¥436.7b and JP¥317.7b worth of receivables due within a year. So its liabilities total JP¥3.68t more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the JP¥1.68t company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Chubu Electric Power Company would probably need a major re-capitalization if its creditors were to demand repayment.
Check out our latest analysis for Chubu Electric Power Company
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). 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).
Chubu Electric Power Company's net debt to EBITDA ratio is 6.8 which suggests rather high debt levels, but its interest cover of 9.8 times suggests the debt is easily serviced. Overall we'd say it seems likely the company is carrying a fairly heavy swag of debt. Importantly Chubu Electric Power Company's EBIT was essentially flat over the last twelve months. We would prefer to see some earnings growth, because that always helps diminish debt. 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 Chubu Electric Power Company'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Chubu Electric Power Company created free cash flow amounting to 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.
Our View
To be frank both Chubu Electric Power Company's net debt to EBITDA 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 covering its interest expense with its EBIT; that's encouraging. We should also note that Electric Utilities industry companies like Chubu Electric Power Company commonly do use debt without problems. We're quite clear that we consider Chubu Electric Power Company to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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 2 warning signs for Chubu Electric Power Company that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.