Is JoulWatt Technology (SHSE:688141) Using Too Much Debt?

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. Importantly, JoulWatt Technology Co., Ltd. (SHSE:688141) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, 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 March 2024 JoulWatt Technology had debt of CN¥1.29b, up from CN¥529.8m in one year. But on the other hand it also has CN¥1.74b in cash, leading to a CN¥448.4m net cash position.

How Healthy Is JoulWatt Technology's Balance Sheet?

The latest balance sheet data shows that JoulWatt Technology had liabilities of CN¥877.2m due within a year, and liabilities of CN¥781.3m falling due after that. Offsetting this, it had CN¥1.74b in cash and CN¥357.6m in receivables that were due within 12 months. So it can boast CN¥441.3m more liquid assets than total liabilities.

This surplus suggests that JoulWatt Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, JoulWatt Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 6.2%, to CN¥1.3b. That's not what we would hope to see.

So How Risky Is JoulWatt Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year JoulWatt Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥510m and booked a CN¥683m accounting loss. But the saving grace is the CN¥448.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 JoulWatt Technology 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.

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