4061 · Denka

Will it survive?

• Can it pay its interest? 12.5×
  Comfortable
  Operating income ¥26.2B ÷ interest expense ¥2.1B
  What this means

  Operating profit covers interest with the kind of margin Graham wanted for a defensive holding. Necessary, not sufficient, it says solvent, not cheap.

• How heavy is the debt, net of cash? ¥186.4B · 7.1× operating profit
  Heavy net debt
  Cash ¥35.3B − debt ¥221.7B
  What this means

  Netting ¥35.3B of cash and short-term investments against ¥221.7B of debt leaves ¥186.4B owed, about 7.1× a year's operating profit (8.5× on the gross debt, before the cash). Net debt is the leverage figure that matters: the cash is already set against the debt. Strategic or illiquid investments aren't counted here.

• How long is cash tied up? 136d
  Long (60+ days)
  DSO 84 + DIO 107 − DPO 54 days
  What this means

  Days cash is tied up between paying suppliers and collecting from customers. Lower is better; a long cycle means growth itself eats cash.

Is it a good business?

• Return on invested capital 6%
  Below average through the cycle
  10-yr median, range 2%–8%; 5% latest = NOPAT ¥20.7B ÷ invested capital ¥439.3B
  Industry peers: median 7%
  What this means

  The rate the business earns on the money tied up in it, Buffett's north star, because over time a stock tracks the ROIC beneath it. Above ~15% sustained hints at a moat; a return below the cost of capital (~8%) erodes value as a business grows rather than building it — the test Buffett weighs most. The headline is the median of the last 10 years (it ran 5% most recently), so one peak or trough year doesn't set the verdict. Asset-light businesses (R&D expensed, little capital) read artificially high, pair this with Owner Earnings.

• Owner-earnings margin 1%
  Thin through the cycle
  10-yr median margin, range -10%–6%; latest (¥31.0B) = operating cash ¥36.2B − maintenance capex ¥67.2B
  Industry peers: median 7%
  What this means

  What an owner could take out without starving the business: operating cash less the maintenance capital it must spend to hold its position — Buffett's owner earnings. That's -8% of revenue this year, a 1% median across 10 years.

• Are earnings backed by cash? 2.30×
  Cash-backed
  Cash from ops ¥36.2B ÷ net income ¥15.7B
  What this means

  How much of reported profit showed up as operating cash. Above 1× is reassuring; well below suggests earnings lean on accruals. One year is noisy, growth and working-capital swings distort it, and this is operating cash, not free cash. Watch the multi-year trend.

How is the cash used?

• Where do the earnings go? —
  No surplus to allocate
  What this means

  The business didn't generate positive Owner Earnings this year, so any distributions came from the balance sheet or borrowing, not from operations.

• Investing or harvesting? 2.30×
  Expanding
  Capex ¥67.2B ÷ depreciation ¥29.2B
  What this means

  Descriptive, not a grade. Above ~1× means investing faster than assets wear out (growth, or, sustained for years, today's earnings carrying less depreciation than tomorrow's will). Below means spending less than it's wearing out (efficiency, or a melting asset base). The ratio won't tell you which; the filings will.

Durability & moat, 2017–2026

Whether the record’s returns held, and what the capital reinvested earned.

• Profitable years 9 of 10
  What this means

  Lost money in 1 year(s), look at what happened there before trusting the average.

• Return on capital ≥ 15% 0 of 10 yrs
  What this means

  A moat shows up as a high return on invested capital that holds year after year, not one good vintage.

• Operating margin 8% → 5% (3-yr avg ends)
  What this means

  Through the cycle the operating margin slipped — about 8% early to 5% lately, median 8% — competition or costs are biting in.

• Reinvestment, incremental ROIC returns capital
  What this means

  The capital base barely grew: this business returns cash through dividends and buybacks rather than reinvesting. Judge it on the cash returned, not on compounding.

• Worst year 2024 · 3.4% op. margin
  What this means

  Stayed profitable even in its hardest year, the resilience that survives recessions.

• Dividend record rising
  What this means

  Paid and raised the dividend across the record, the continuity Graham prized.