Is Jiangxi Jovo Energy (SHSE:605090) Using Too Much Debt?

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.' 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. As with many other companies Jiangxi Jovo Energy Co., Ltd (SHSE:605090) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangxi Jovo Energy

How Much Debt Does Jiangxi Jovo Energy Carry?

The image below, which you can click on for greater detail, shows that Jiangxi Jovo Energy had debt of CN¥3.58b at the end of September 2024, a reduction from CN¥4.02b over a year. But on the other hand it also has CN¥4.75b in cash, leading to a CN¥1.17b net cash position.

A Look At Jiangxi Jovo Energy's Liabilities

We can see from the most recent balance sheet that Jiangxi Jovo Energy had liabilities of CN¥2.33b falling due within a year, and liabilities of CN¥2.72b due beyond that. Offsetting these obligations, it had cash of CN¥4.75b as well as receivables valued at CN¥965.0m due within 12 months. So it can boast CN¥667.2m 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. Simply put, the fact that Jiangxi Jovo Energy has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Jiangxi Jovo Energy grew its EBIT by 3.3% in the last year, making that debt load look even more manageable. 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 Jiangxi Jovo 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 company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Jiangxi Jovo Energy created free cash flow amounting to 8.9% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangxi Jovo Energy has CN¥1.17b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 3.3% over the last year. So we are not troubled with Jiangxi Jovo Energy's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Jiangxi Jovo Energy has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.