Here's Why Jiangxi Jovo Energy (SHSE:605090) Can Manage Its Debt Responsibly

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.' 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 note that Jiangxi Jovo Energy Co., Ltd (SHSE:605090) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Jiangxi Jovo Energy

What Is Jiangxi Jovo Energy's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangxi Jovo Energy had debt of CN¥4.06b, up from CN¥3.64b in one year. But on the other hand it also has CN¥5.57b in cash, leading to a CN¥1.51b net cash position.

A Look At Jiangxi Jovo Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangxi Jovo Energy had liabilities of CN¥3.14b due within 12 months and liabilities of CN¥3.04b due beyond that. Offsetting these obligations, it had cash of CN¥5.57b as well as receivables valued at CN¥1.13b due within 12 months. So it actually has CN¥515.6m more liquid assets than total liabilities.

This surplus suggests that Jiangxi Jovo Energy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangxi Jovo Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Jiangxi Jovo Energy has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. 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 Jiangxi Jovo Energy'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. Jiangxi Jovo Energy 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, Jiangxi Jovo Energy recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangxi Jovo Energy has net cash of CN¥1.51b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 31% over the last year. So we don't think Jiangxi Jovo Energy's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Jiangxi Jovo Energy (including 1 which is concerning) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com