We Think Jiangxi Jovo Energy (SHSE:605090) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Jiangxi Jovo Energy Co., Ltd (SHSE:605090) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangxi Jovo Energy had CN¥4.02b of debt, an increase on CN¥1.82b, over one year. But on the other hand it also has CN¥6.50b in cash, leading to a CN¥2.48b net cash position.

How Healthy Is Jiangxi Jovo Energy's Balance Sheet?

According to the last reported balance sheet, Jiangxi Jovo Energy had liabilities of CN¥3.90b due within 12 months, and liabilities of CN¥3.24b due beyond 12 months. On the other hand, it had cash of CN¥6.50b and CN¥439.9m worth of receivables due within a year. So its liabilities total CN¥192.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Jiangxi Jovo Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥16.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Jiangxi Jovo Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jiangxi Jovo Energy grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jiangxi Jovo 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. Looking at the most recent three years, Jiangxi Jovo Energy recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Jiangxi Jovo Energy's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.48b. And we liked the look of last year's 53% year-on-year EBIT growth. 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. For instance, we've identified 1 warning sign for Jiangxi Jovo Energy that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.