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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Western Superconducting Technologies Co., Ltd. (SHSE:688122) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

What Is Western Superconducting Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Western Superconducting Technologies had debt of CN¥2.80b, up from CN¥2.56b in one year. However, it does have CN¥2.90b in cash offsetting this, leading to net cash of CN¥96.4m.

A Look At Western Superconducting Technologies' Liabilities

We can see from the most recent balance sheet that Western Superconducting Technologies had liabilities of CN¥3.87b falling due within a year, and liabilities of CN¥1.56b due beyond that. Offsetting this, it had CN¥2.90b in cash and CN¥3.32b in receivables that were due within 12 months. So it can boast CN¥776.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Western Superconducting Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Western Superconducting Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Western Superconducting Technologies's saving grace is its low debt levels, because its EBIT has tanked 49% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Western Superconducting 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Western Superconducting Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Western Superconducting Technologies has net cash of CN¥96.4m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Western Superconducting Technologies's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Western Superconducting Technologies has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com