Does Western Superconducting Technologies (SHSE:688122) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Western Superconducting Technologies Co., Ltd. (SHSE:688122) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Western Superconducting Technologies

How Much Debt Does Western Superconducting Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Western Superconducting Technologies had CN¥2.72b of debt, an increase on CN¥2.44b, over one year. However, it does have CN¥2.67b in cash offsetting this, leading to net debt of about CN¥49.8m.

A Look At Western Superconducting Technologies' Liabilities

The latest balance sheet data shows that Western Superconducting Technologies had liabilities of CN¥3.42b due within a year, and liabilities of CN¥1.92b falling due after that. On the other hand, it had cash of CN¥2.67b and CN¥3.43b worth of receivables due within a year. So it can boast CN¥753.7m more liquid assets than total liabilities.

This surplus suggests that Western Superconducting Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Western Superconducting Technologies has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With debt at a measly 0.057 times EBITDA and EBIT covering interest a whopping 16.0 times, it's clear that Western Superconducting Technologies is not a desperate borrower. So relative to past earnings, the debt load seems trivial. It is just as well that Western Superconducting Technologies's load is not too heavy, because its EBIT was down 37% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Western Superconducting Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Western Superconducting Technologies saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

While Western Superconducting Technologies's EBIT growth rate has us nervous. To wit both its interest cover and net debt to EBITDA were encouraging signs. We think that Western Superconducting Technologies's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Western Superconducting Technologies you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.