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

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, Geo-Jade Petroleum Corporation (SHSE:600759) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Geo-Jade Petroleum

What Is Geo-Jade Petroleum's Net Debt?

The image below, which you can click on for greater detail, shows that Geo-Jade Petroleum had debt of CN¥712.7m at the end of June 2024, a reduction from CN¥3.48b over a year. But it also has CN¥881.4m in cash to offset that, meaning it has CN¥168.7m net cash.

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

According to the last reported balance sheet, Geo-Jade Petroleum had liabilities of CN¥1.20b due within 12 months, and liabilities of CN¥2.78b due beyond 12 months. Offsetting these obligations, it had cash of CN¥881.4m as well as receivables valued at CN¥255.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.84b.

While this might seem like a lot, it is not so bad since Geo-Jade Petroleum has a market capitalization of CN¥10.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Geo-Jade Petroleum recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Geo-Jade Petroleum does have more liabilities than liquid assets, it also has net cash of CN¥168.7m. So we are not troubled with Geo-Jade Petroleum's debt use. 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 2 warning signs for Geo-Jade Petroleum (1 is significant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.