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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that JoulWatt Technology Co., Ltd. (SHSE:688141) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for JoulWatt Technology

What Is JoulWatt Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 JoulWatt Technology had debt of CN¥1.30b, up from CN¥699.6m in one year. However, it does have CN¥1.51b in cash offsetting this, leading to net cash of CN¥210.1m.

How Strong Is JoulWatt Technology's Balance Sheet?

We can see from the most recent balance sheet that JoulWatt Technology had liabilities of CN¥955.0m falling due within a year, and liabilities of CN¥791.4m due beyond that. On the other hand, it had cash of CN¥1.51b and CN¥475.3m worth of receivables due within a year. So it actually has CN¥243.0m more liquid assets than total liabilities.

This short term liquidity is a sign that JoulWatt Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 it is future earnings, more than anything, that will determine JoulWatt Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, JoulWatt Technology saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is JoulWatt Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that JoulWatt Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥448m of cash and made a loss of CN¥678m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥210.1m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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, we've discovered 1 warning sign for JoulWatt Technology that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.