4063 · Shin-Etsu Chemical

Will it survive?

• Can it pay its interest? 234.7×
  Comfortable
  Operating income ¥635.2B ÷ interest expense ¥2.7B
  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? +¥325.1B
  Net cash
  Cash ¥562.1B + ST investments ¥7.0B − debt ¥244.0B
  What this means

  Cash and short-term investments exceed every dollar of debt by ¥325.1B, on net the company owes nothing, and can act from strength when others can't. 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? 108d
  Long (60+ days)
  DSO 76 + DIO 70 − DPO 38 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 16%
  High through the cycle
  10-yr median, range 13%–28%; 15% latest = NOPAT ¥501.8B ÷ invested capital ¥3.34T
  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 15% 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 17%
  High through the cycle
  10-yr median margin, range 15%–25%; latest ¥469.7B = operating cash ¥712.7B − maintenance capex ¥243.0B
  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 18% of revenue this year, a 17% median across 10 years. It chose to put ¥110.6B more into growth, so free cash flow this year was ¥359.0B — the gap is investment, not weakness.

• Are earnings backed by cash? 1.50×
  Cash-backed
  Cash from ops ¥712.7B ÷ net income ¥474.5B
  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? 150%
  Returned more than it generated
  Dividends + buybacks ¥703.2B ÷ Owner Earnings ¥469.7B
  What this means

  The company returned more than it generated: against ¥469.7B of Owner Earnings, ¥703.2B (150%) went back to shareholders, ¥203.2B dividends, ¥500.0B buybacks — the excess came from the balance sheet or borrowing, not the year's operations. Sustained, that pattern draws down cash or adds debt; the net-debt line above shows where it stands.

• Investing or harvesting? 1.46×
  Expanding
  Capex ¥353.6B ÷ depreciation ¥243.0B
  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 10 of 10
  What this means

  Never lost money over the record, the earnings stability Graham insisted on.

• Return on capital ≥ 15% 7 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 23% → 28% (3-yr avg ends)
  What this means

  Through the cycle the operating margin widened — about 23% early to 28% lately, median 26% — pricing power intact or improving.

• Reinvestment, incremental ROIC 16%
  What this means

  Every extra dollar the business reinvested came back at a high incremental return — the lens GBM read for a moat that reinvests rather than merely harvests. The record and the 10-K are where you check whether the rate holds.

• Owner earnings growth +11%/yr
  What this means

  Owner earnings grew about 11% a year over the record.

• Worst year 2017 · 19.3% 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.