Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, JoulWatt Technology Co., Ltd. (SHSE:688141) does carry debt. But the real question is whether this debt is making the company risky.

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 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is JoulWatt Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 JoulWatt Technology had CN¥1.29b of debt, an increase on CN¥529.8m, over one year. But it also has CN¥1.74b in cash to offset that, meaning it has CN¥448.4m net cash.

How Healthy Is JoulWatt Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JoulWatt Technology had liabilities of CN¥877.2m due within 12 months and liabilities of CN¥781.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.74b as well as receivables valued at CN¥357.6m due within 12 months. So it can boast CN¥441.3m 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! There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year JoulWatt Technology had a loss before interest and tax, and actually shrunk its revenue by 3.8%, to CN¥1.4b. That's not what we would hope to see.

So How Risky Is JoulWatt Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that JoulWatt Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥416m and booked a CN¥687m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥448.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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 instance, we've identified 1 warning sign for JoulWatt Technology that 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.