Is JWIPC Technology (SZSE:001339) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that JWIPC Technology Co., Ltd. (SZSE:001339) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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 JWIPC Technology

What Is JWIPC Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 JWIPC Technology had CN¥305.9m of debt, an increase on CN¥80.0m, over one year. But it also has CN¥675.5m in cash to offset that, meaning it has CN¥369.6m net cash.

How Strong Is JWIPC Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JWIPC Technology had liabilities of CN¥1.23b due within 12 months and liabilities of CN¥27.9m due beyond that. Offsetting these obligations, it had cash of CN¥675.5m as well as receivables valued at CN¥513.2m due within 12 months. So its liabilities total CN¥68.0m more than the combination of its cash and short-term receivables.

Having regard to JWIPC Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.18b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, JWIPC Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that JWIPC Technology's load is not too heavy, because its EBIT was down 75% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 JWIPC Technology 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While JWIPC Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, JWIPC Technology burned a lot of cash. 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that JWIPC Technology has CN¥369.6m in net cash. So while JWIPC Technology does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for JWIPC Technology (1 is potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com