GoodWe Technologies (SHSE:688390) Takes On Some Risk With Its Use Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that GoodWe Technologies Co., Ltd. (SHSE:688390) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for GoodWe Technologies

What Is GoodWe Technologies's Debt?

As you can see below, at the end of March 2024, GoodWe Technologies had CN¥295.4m of debt, up from CN¥60.1m a year ago. Click the image for more detail. But it also has CN¥906.9m in cash to offset that, meaning it has CN¥611.5m net cash.

How Healthy Is GoodWe Technologies' Balance Sheet?

According to the last reported balance sheet, GoodWe Technologies had liabilities of CN¥3.21b due within 12 months, and liabilities of CN¥515.4m due beyond 12 months. Offsetting this, it had CN¥906.9m in cash and CN¥992.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.83b more than its cash and near-term receivables, combined.

Given GoodWe Technologies has a market capitalization of CN¥17.5b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, GoodWe Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for GoodWe Technologies if management cannot prevent a repeat of the 54% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GoodWe Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While GoodWe Technologies 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, GoodWe Technologies reported free cash flow worth 2.6% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although GoodWe Technologies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥611.5m. So although we see some areas for improvement, we're not too worried about GoodWe Technologies's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GoodWe Technologies is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.