Here's Why Jiangsu Xukuang Energy (SHSE:600925) Has A Meaningful Debt Burden

Warren Buffett famously said, '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 Xukuang Energy Co., Ltd. (SHSE:600925) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

See our latest analysis for Jiangsu Xukuang Energy

What Is Jiangsu Xukuang Energy's Net Debt?

As you can see below, Jiangsu Xukuang Energy had CN¥7.57b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥7.84b in cash to offset that, meaning it has CN¥278.4m net cash.

How Healthy Is Jiangsu Xukuang Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Xukuang Energy had liabilities of CN¥9.91b due within 12 months and liabilities of CN¥10.4b due beyond that. Offsetting this, it had CN¥7.84b in cash and CN¥3.24b in receivables that were due within 12 months. So its liabilities total CN¥9.23b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Jiangsu Xukuang Energy has a market capitalization of CN¥38.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Jiangsu Xukuang Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Jiangsu Xukuang Energy's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu Xukuang Energy'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangsu Xukuang 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. In the last three years, Jiangsu Xukuang Energy created free cash flow amounting to 7.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

Although Jiangsu Xukuang Energy'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¥278.4m. So although we see some areas for improvement, we're not too worried about Jiangsu Xukuang Energy's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Jiangsu Xukuang Energy .

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.