Jiangsu Linyang Energy (SHSE:601222) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Jiangsu Linyang Energy Co., Ltd. (SHSE:601222) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiangsu Linyang Energy

What Is Jiangsu Linyang Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Linyang Energy had CN¥3.26b of debt, an increase on CN¥3.03b, over one year. But on the other hand it also has CN¥6.46b in cash, leading to a CN¥3.20b net cash position.

How Healthy Is Jiangsu Linyang Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Linyang Energy had liabilities of CN¥6.13b due within 12 months and liabilities of CN¥2.50b due beyond that. On the other hand, it had cash of CN¥6.46b and CN¥4.88b worth of receivables due within a year. So it can boast CN¥2.71b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Linyang Energy is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Jiangsu Linyang Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Jiangsu Linyang Energy saw its EBIT drop by 6.6% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Jiangsu Linyang Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangsu Linyang Energy 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, Jiangsu Linyang Energy 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 we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Linyang Energy has net cash of CN¥3.20b, as well as more liquid assets than liabilities. So we are not troubled with Jiangsu Linyang Energy'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. Case in point: We've spotted 1 warning sign for Jiangsu Linyang Energy 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.