Is Jolywood (Suzhou) SunwattLtd (SZSE:300393) Weighed On By Its Debt Load?

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.' 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 can see that Jolywood (Suzhou) Sunwatt Co.,Ltd. (SZSE:300393) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jolywood (Suzhou) SunwattLtd

How Much Debt Does Jolywood (Suzhou) SunwattLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jolywood (Suzhou) SunwattLtd had debt of CN¥6.90b, up from CN¥6.49b in one year. However, it also had CN¥1.56b in cash, and so its net debt is CN¥5.34b.

A Look At Jolywood (Suzhou) SunwattLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Jolywood (Suzhou) SunwattLtd had liabilities of CN¥9.05b due within 12 months and liabilities of CN¥3.68b due beyond that. Offsetting this, it had CN¥1.56b in cash and CN¥4.15b in receivables that were due within 12 months. So its liabilities total CN¥7.02b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥6.42b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jolywood (Suzhou) SunwattLtd 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.

In the last year Jolywood (Suzhou) SunwattLtd had a loss before interest and tax, and actually shrunk its revenue by 40%, to CN¥7.1b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Jolywood (Suzhou) SunwattLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥484m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥261m. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jolywood (Suzhou) SunwattLtd you should know about.

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.