GoodWe Technologies (SHSE:688390) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, GoodWe Technologies Co., Ltd. (SHSE:688390) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for GoodWe Technologies

How Much Debt Does GoodWe Technologies Carry?

As you can see below, at the end of September 2024, GoodWe Technologies had CN¥1.60b of debt, up from CN¥59.3m a year ago. Click the image for more detail. On the flip side, it has CN¥854.4m in cash leading to net debt of about CN¥742.4m.

How Strong Is GoodWe Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GoodWe Technologies had liabilities of CN¥4.14b due within 12 months and liabilities of CN¥520.6m due beyond that. Offsetting these obligations, it had cash of CN¥854.4m as well as receivables valued at CN¥1.22b due within 12 months. So it has liabilities totalling CN¥2.59b more than its cash and near-term receivables, combined.

This deficit isn't so bad because GoodWe Technologies is worth CN¥9.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine GoodWe Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year GoodWe Technologies had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥6.6b. That's not what we would hope to see.

Caveat Emptor

While GoodWe Technologies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥104m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥1.6b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 1 warning sign for GoodWe Technologies you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.