Is Jade Power Trust (CVE:JPWR.UN) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jade Power Trust (CVE:JPWR.UN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jade Power Trust

What Is Jade Power Trust's Net Debt?

The image below, which you can click on for greater detail, shows that Jade Power Trust had debt of CA$3.15m at the end of September 2020, a reduction from CA$3.78m over a year. But it also has CA$3.59m in cash to offset that, meaning it has CA$442.1k net cash.

How Strong Is Jade Power Trust's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jade Power Trust had liabilities of CA$11.6m due within 12 months and liabilities of CA$24.0m due beyond that. Offsetting this, it had CA$3.59m in cash and CA$6.88m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$25.1m.

This is a mountain of leverage relative to its market capitalization of CA$28.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Jade Power Trust boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Jade Power Trust's EBIT launched higher than Elon Musk, gaining a whopping 247% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jade Power Trust's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jade Power Trust has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Jade Power Trust recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

Although Jade Power Trust's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$442.1k. And it impressed us with free cash flow of CA$3.0m, being 93% of its EBIT. So we don't have any problem with Jade Power Trust's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Jade Power Trust that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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