Zombie Apocalypse: Japan's 5 Most Vulnerable Companies Facing Bankruptcy in 2023

Data analysis and news insights expose the hardest struggling Japanese Zombie Companies in the era of skyrocketing interest rates

As the economic tide is turning and far more companies are facing financial distress than previously, I have put together a thorough analysis of the top Japanese companies at risk of bankruptcy.

Utilizing financial metrics such as interest coverage ratio (ICR), debt-to-equity and market capitalization, my list reveals the firms most likely to face financial distress in the coming year.

An Interest Coverage Ratio, or ICR, compares a company's earnings before interest and taxes (EBIT) to its interest expenses. A ratio below 1 suggests that a company may struggle to meet its debt obligations as it has to borrow money or sell its assets to pay them. All of the companies on this list have an ICR below 1, indicating a significant level of financial stress.

In addition, I have incorporated the Debt-to-Equity Ratio, which reflects the proportion of debt utilized to finance a company's assets compared to the worth of its shareholder investments, offering an insight into the magnitude of their debt burden.

Furthermore, I have ranked these companies based on their market capitalization by multiplying the total number of shares by their present share price, to weigh in the potential impact of their bankruptcy.

It is important to note that this is not a comprehensive list and investors should always conduct further research before making any investment decisions.

So, without further ado, here are the:

Top 5 Japanese Corporations at Risk of Bankruptcy in the Imminent Future

5. Ringer Hut Co Ltd (TSE: 8200)

• Market cap: ¥58.86 Billion

• Debt/Equity: 114.98%

Ringer Hut Co Ltd. (TSE: 8200), the world's most beloved Champon restaurant chain, is on the brink of financial collapse. With an operating profit margin of -5% and a total debt to equity ratio of 114.98%, the company is struggling to generate enough revenue to cover its expenses and debt obligations. To make matters worse, Ringer Hut's Interest Coverage Ratio (ICR) is well below 1, indicating that the company is unable to generate enough income to cover its interest payments.

The changing tastes of consumers has played a major role in Ringer Hut's financial troubles. In recent years, there has been a shift away from traditional Chinese cuisine like Champon in favor of more upscale Chinese restaurants and authentic Chinese eateries like Tim Ho Wan or hotpot and Chinese ramen places. As a result, Ringer Hut's sales and revenue have been negatively impacted and without some serious rebranding, the company will likely not recover.

Now, with interest rates on the rise, Ringer Hut's financial situation is becoming even more dire. The company's negative margins will be even more costly as they are forced to take on more loans to stay afloat. This could lead to a vicious cycle of debt and declining revenues, putting the company at even greater risk of bankruptcy.

The management of Ringer Hut must act quickly to address the company's financial troubles. Cost cutting measures, diversifying the menu offerings, and finding ways to increase revenue could help the company stay afloat. The company's investors and stakeholders should be prepared for the worst and liquidate the company’s assets, or be prepared to invest heavily in a rebranding campaign...

4. Toyo Gosei Co., Ltd. (TSE: 4970)

• Market cap: ¥75.64 Billion

• Debt/Equity: 114.42%

Toyo Gosei Co., Ltd. (TSE: 4970), a company that specializes in photosensitive materials and polymer products for the semiconductor and display industries, as well as storage and distribution of high-purity synthetic solvents, chemicals for fragrances, and liquid chemicals, is on the brink of financial disaster.

The company has a relatively modest P/E ratio of 17.99, but an incredibly high price-to-book ratio of 12.52, and a debt-to-equity ratio of 114.42%. This, along with an ICR below 1 suggests that the company may be facing financial difficulties, and its bankruptcy may be imminent.

The high price-to-book ratio is a cause for concern, as it indicates that the company's stock is overvalued relative to its book value. This suggests that the market may have overestimated the company's future earnings potential. Additionally, the company's high debt-to-equity ratio is also a red flag. This makes the company more vulnerable to financial difficulties, especially in times of economic downturn.

To make matters worse, the industry in which Toyo Gosei operates is extremely capital-intensive. The company must constantly invest in new technology and equipment to stay competitive, and with interest rates on the rise, the cost of borrowing will only increase, putting even more pressure on the company's already fragile financial situation. This, coupled with the company's high debt-to-equity ratio, makes it highly unlikely that it will be able to secure the necessary funding to continue operations in the long run.

In conclusion, Toyo Gosei Co., Ltd. high price-to-book ratio, high debt-to-equity ratio, lack of recent financial data, and the capital-intensive nature of its industry all suggest that bankruptcy may be imminent.

3. Freee K.K. (4478.T)

Market Cap: ¥189.58 billion

Debt/Equity: 179%

Freee K.K. (4478.T), the once revered SAAS accounting tool that promised to change the game for Japan's small businesses, is now on the brink of collapse. The company's books are deep in the red, and it's clear that it is facing financial troubles of epic proportions. With a debt-to-equity ratio of 179%, the company has taken on a massive amount of debt relative to its equity, making it more vulnerable to financial difficulties.

The company's price-to-book ratio of 5.96 is not unusual for a software company in its growth phase, but with piles of debt and venture capital drying up, there is a very long way for the stock to fall.

The accounting software industry is a highly competitive market with many established players, but the real kicker for Freee K.K. is that it has not been able to expand anywhere but Japan. Meanwhile, foreign competitors are swarming the Japanese market, eating into Freee's share. With a lack of diversification and the inability to expand to new markets, the company is facing an uphill battle in a market that is becoming increasingly crowded.

Furthermore, the venture capital landscape has shifted in recent years, with investors becoming more risk-averse and focusing on more established companies. This makes it even more difficult for startups like Freee to secure funding. With a lack of funding and a highly competitive market, the company may not have the resources it needs to survive.

In conclusion, Freee K.K. is in dire straits. The company's high debt-to-equity ratio, lack of funding, inability to expand to new markets, and the highly competitive nature of the accounting software industry all suggest that bankruptcy may be inevitable. The future looks bleak for Freee K.K. and it's hard to see a way out of this financial spiral.

2. Mercari, Inc. (TSE: 4385)

Market cap: ¥441.80 billion

Debt/Equity: 350.02%

Another former wunderkind of Japan’s startup scene, Mercari, Inc. (TSE: 4385), is on the brink of collapse.

The e-commerce giant, which operates an online marketplace that allows individuals to buy and sell new and used goods, has taken on a dangerously high amount of debt, with a debt-to-equity ratio of 350%. This is an alarmingly high level of debt relative to the company's equity and it is a clear indication that the company is in dire financial straits.

Furthermore, Mercari's price-to-book ratio of 11.13x is alarmingly high, signaling that the market may be overestimating the company's value. Combined with the staggering debt-to-equity ratio, it is clear that Mercari is facing a financial crisis of unprecedented proportions.

In recent years, Mercari had ever-growing ambitions with its global expansion plans. However, it has not gone well…

Mercari's efforts to expand in the US have been nothing short of a catastrophe, with the company losing billions of dollars in its failed attempts to compete with established players like Amazon and eBay. The company's inability to gain a foothold in the US market is a death knell for its future prospects, as it has severely limited Mercari's potential for growth.

The market is in agreement that Mercari is on the brink of collapse, with the stock dropping a staggering 62% since 2021. This reflects the market's growing concerns about the company's financial health and future prospects.

In conclusion, Mercari, Inc’s dangerously high debt-to-equity ratio, alarmingly high price-to-book ratio, and catastrophic failures to expand in the US all suggest that the company may be on the brink of bankruptcy. With the stock dropping 62% since 2021, the market seems to be in agreement that Mercari's future is uncertain at best and catastrophic at worst.

1. Rakuten Group (TSE: 4755)

Market Cap: ¥1.07 Trillion

Debt/Equity: 485%

In the top of perhaps the least prestigious list in Japan is none other than Rakuten Group, once hailed as a darling in Japan's new corporate world.

The company, with its staggering 485.1% debt-to-equity ratio and a mobile division that is hemorrhaging money and creating ever-increasing losses, is headed for financial ruin. The once-successful internet giant is now seen as the black sheep of the industry, with a tarnished reputation due to its questionable employee practices (http://himasoku.com/archives/52210676.html [JP]) and a leadership that is pouring money into increasingly bad directions.

Investors and analysts are scrambling to understand the sudden downfall of the company, which was once considered a leader in the industry.

But for those who have been paying attention, the warning signs have been there for some time: The company's high debt-to-equity ratio has been a red flag for years, and the mobile division's struggles and increasing cost base have been well-documented.

However, my opinion is that it is the CEO, Hiroshi Mikitani and mobile division leader Tareq Amin’s erratic behavior and overconfidence in their execution that has sent Rakuten spiraling out of control.

For those who are interested in understanding the full extent of Rakuten's problems, read my stock-analysis. It details the financial and managerial issues that have led to the company's downfall, and it is a must-read for anyone considering investing in Rakuten:

[Stock-Analysis] Rakuten (4755 TYO): The Amazon of Japan Betting Everything on Mobile

The truth is, Rakuten is at its core a good company in a badly managed situation. Its other divisions are still profitable, growing and the coming spinoff of its banking division is a smart move that will generate a substantial liquidity flow and ease regulations on its core businesses. However, the crisis that is its mobile division is big enough to threaten the very existence of Rakuten if some major restructuring is not done.

Rakuten was once a shining example of what a successful internet company could be, but now it is a cautionary tale of what not to do. For those who have invested in Rakuten, it is a harsh lesson in the risks of investing in a company with financial and management issues. For the employees, it is a reminder that their hard work and dedication means nothing if the company's leadership fails them.

In conclusion, Rakuten Group is on the brink of collapse, and it is only a matter of time before it goes bankrupt if nothing is done. I advise investors and analysts to stay away from Rakuten and to read my stock-analysis on the company to understand the full extent of the problem.