David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, JWIPC Technology Co., Ltd. (SZSE:001339) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is JWIPC Technology's Net Debt?
You can click the graphic below for the historical numbers, but it shows that JWIPC Technology had CN¥101.1m of debt in September 2023, down from CN¥139.6m, one year before. However, its balance sheet shows it holds CN¥628.8m in cash, so it actually has CN¥527.7m net cash.
A Look At JWIPC Technology's Liabilities
Zooming in on the latest balance sheet data, we can see that JWIPC Technology had liabilities of CN¥1.18b due within 12 months and liabilities of CN¥21.2m due beyond that. Offsetting these obligations, it had cash of CN¥628.8m as well as receivables valued at CN¥656.4m due within 12 months. So it actually has CN¥83.9m more liquid assets than total liabilities.
This state of affairs indicates that JWIPC Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥5.71b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that JWIPC Technology has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for JWIPC Technology if management cannot prevent a repeat of the 80% cut to EBIT 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 it is future earnings, more than anything, that will determine JWIPC Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, JWIPC 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
While it is always sensible to investigate a company's debt, in this case JWIPC Technology has CN¥527.7m in net cash and a decent-looking balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that JWIPC Technology is showing 3 warning signs in our investment analysis , and 2 of those are a bit unpleasant...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.