Here's Why JoulWatt Technology (SHSE:688141) Can Afford Some 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 JoulWatt Technology Co., Ltd. (SHSE:688141) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for JoulWatt Technology

What Is JoulWatt Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 JoulWatt Technology had debt of CN¥1.45b, up from CN¥987.2m in one year. However, because it has a cash reserve of CN¥1.39b, its net debt is less, at about CN¥62.3m.

How Strong Is JoulWatt Technology's Balance Sheet?

According to the last reported balance sheet, JoulWatt Technology had liabilities of CN¥1.13b due within 12 months, and liabilities of CN¥749.0m due beyond 12 months. On the other hand, it had cash of CN¥1.39b and CN¥482.7m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that JoulWatt Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥13.7b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, JoulWatt Technology has a very light debt load indeed. 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 JoulWatt Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year JoulWatt Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 5.1%, to CN¥1.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months JoulWatt Technology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥633m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥534m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for JoulWatt Technology that 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.