Yantai Jereh Oilfield Services Group (SZSE:002353) Seems To Use Debt Quite Sensibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Yantai Jereh Oilfield Services Group Co., Ltd. (SZSE:002353) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Yantai Jereh Oilfield Services Group

How Much Debt Does Yantai Jereh Oilfield Services Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Yantai Jereh Oilfield Services Group had debt of CN¥5.22b, up from CN¥3.92b in one year. However, its balance sheet shows it holds CN¥8.11b in cash, so it actually has CN¥2.88b net cash.

How Healthy Is Yantai Jereh Oilfield Services Group's Balance Sheet?

We can see from the most recent balance sheet that Yantai Jereh Oilfield Services Group had liabilities of CN¥9.87b falling due within a year, and liabilities of CN¥4.07b due beyond that. On the other hand, it had cash of CN¥8.11b and CN¥8.14b worth of receivables due within a year. So it can boast CN¥2.31b 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. Succinctly put, Yantai Jereh Oilfield Services Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Yantai Jereh Oilfield Services Group has increased its EBIT by 5.0% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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'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. 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 reported free cash flow worth 3.6% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

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¥2.88b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 5.0% in the last twelve months. So we are not troubled with Yantai Jereh Oilfield Services Group'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. Be aware that Yantai Jereh Oilfield Services Group is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.