Does Geo-Jade Petroleum (SHSE:600759) Have A Healthy Balance Sheet?

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 note that Geo-Jade Petroleum Corporation (SHSE:600759) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Geo-Jade Petroleum

What Is Geo-Jade Petroleum's Net Debt?

As you can see below, Geo-Jade Petroleum had CN¥636.0m of debt at September 2024, down from CN¥3.48b a year prior. However, its balance sheet shows it holds CN¥814.0m in cash, so it actually has CN¥177.9m net cash.

How Strong Is Geo-Jade Petroleum's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Geo-Jade Petroleum had liabilities of CN¥1.06b due within 12 months and liabilities of CN¥2.77b due beyond that. Offsetting this, it had CN¥814.0m in cash and CN¥265.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.76b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Geo-Jade Petroleum is worth CN¥9.34b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Geo-Jade Petroleum boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Geo-Jade Petroleum's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Geo-Jade Petroleum's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Geo-Jade Petroleum may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Geo-Jade Petroleum recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Geo-Jade Petroleum's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥177.9m. So we don't have any problem with Geo-Jade Petroleum's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Geo-Jade Petroleum .

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.