Does Yantai Jereh Oilfield Services Group (SZSE:002353) 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.' 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 Yantai Jereh Oilfield Services Group Co., Ltd. (SZSE:002353) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yantai Jereh Oilfield Services Group

What Is Yantai Jereh Oilfield Services Group's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Yantai Jereh Oilfield Services Group had debt of CN¥4.44b, up from CN¥2.50b in one year. But it also has CN¥7.18b in cash to offset that, meaning it has CN¥2.74b net cash.

A Look At Yantai Jereh Oilfield Services Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Yantai Jereh Oilfield Services Group had liabilities of CN¥9.72b due within 12 months and liabilities of CN¥2.42b due beyond that. Offsetting this, it had CN¥7.18b in cash and CN¥9.57b in receivables that were due within 12 months. So it can boast CN¥4.62b more liquid assets than total liabilities.

This surplus suggests that Yantai Jereh Oilfield Services Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yantai Jereh Oilfield Services Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Yantai Jereh Oilfield Services Group grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yantai Jereh Oilfield Services Group'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. While Yantai Jereh Oilfield Services Group 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. Over the last three years, Yantai Jereh Oilfield Services Group recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yantai Jereh Oilfield Services Group has net cash of CN¥2.74b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't have any problem with Yantai Jereh Oilfield Services Group's use of debt. 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 example - Yantai Jereh Oilfield Services Group has 1 warning sign we think you should be aware of.

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.