JA Solar Technology (SZSE:002459) Has A Pretty Healthy Balance Sheet

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.' 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, JA Solar Technology Co., Ltd. (SZSE:002459) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for JA Solar Technology

How Much Debt Does JA Solar Technology Carry?

As you can see below, at the end of September 2023, JA Solar Technology had CN¥10.5b of debt, up from CN¥6.24b a year ago. Click the image for more detail. However, it does have CN¥19.4b in cash offsetting this, leading to net cash of CN¥8.94b.

How Healthy Is JA Solar Technology's Balance Sheet?

According to the last reported balance sheet, JA Solar Technology had liabilities of CN¥47.5b due within 12 months, and liabilities of CN¥17.9b due beyond 12 months. Offsetting these obligations, it had cash of CN¥19.4b as well as receivables valued at CN¥10.9b due within 12 months. So its liabilities total CN¥35.2b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because JA Solar Technology is worth CN¥63.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, JA Solar Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that JA Solar Technology has boosted its EBIT by 89%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine JA Solar 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. JA Solar Technology 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, JA Solar Technology 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

Although JA Solar Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥8.94b. And we liked the look of last year's 89% year-on-year EBIT growth. So we are not troubled with JA Solar Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that JA Solar Technology is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.