5631 · Japan Steel Works

Will it survive?

• Can it pay its interest? 34.8×
  Comfortable
  Operating income ¥25.3B ÷ interest expense ¥728M
  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? ¥11.0B · 0.4× operating profit
  Modest net debt
  Cash ¥77.4B − debt ¥88.4B
  What this means

  Netting ¥77.4B of cash and short-term investments against ¥88.4B of debt leaves ¥11.0B owed, about 0.4× a year's operating profit (3.5× 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? 50d
  Tight
  DSO 84 + DIO 8 − DPO 43 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 11%
  Solid through the cycle
  10-yr median, range 8%–18%; 10% latest = NOPAT ¥20.0B ÷ invested capital ¥200.6B
  Industry peers: median 8%
  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 10% 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 2%
  Thin through the cycle
  10-yr median margin, range -9%–11%; latest (¥25.9B) = operating cash (¥16.9B) − maintenance capex ¥9.1B
  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 -9% of revenue this year, a 2% median across 10 years. It chose to put ¥14.6B more into growth, so free cash flow this year was (¥40.6B) — the gap is investment, not weakness.

• Are earnings backed by cash? -0.88×
  Thinly cash-backed
  Cash from ops (¥16.9B) ÷ net income ¥19.2B
  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? 2.62×
  Expanding
  Capex ¥23.7B ÷ depreciation ¥9.1B
  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% 2 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 9% → 9% (3-yr avg ends)
  What this means

  Through the cycle the operating margin held roughly steady — about 9% early, 9% lately, median 7%.

• Reinvestment, incremental ROIC 4%
  What this means

  Reinvested capital came back at only a modest incremental return — near the cost of capital, where extra growth adds little per dollar. The record shows whether it is a soft stretch or a thinning moat.

• Worst year 2021 · 5.2% op. margin
  What this means

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

• Share count +0.0%/yr
  What this means

  Roughly flat share count, little dilution, little buyback.

• Dividend record rising
  What this means

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