These 4 Measures Indicate That Jiangxi Bestoo EnergyLtd (SZSE:001376) Is Using Debt Safely

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.' 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. As with many other companies Jiangxi Bestoo Energy Co.,Ltd. (SZSE:001376) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jiangxi Bestoo EnergyLtd

What Is Jiangxi Bestoo EnergyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangxi Bestoo EnergyLtd had CN¥373.9m of debt in September 2024, down from CN¥408.7m, one year before. However, it does have CN¥419.0m in cash offsetting this, leading to net cash of CN¥45.1m.

How Strong Is Jiangxi Bestoo EnergyLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiangxi Bestoo EnergyLtd had liabilities of CN¥534.8m falling due within a year, and liabilities of CN¥33.4m due beyond that. Offsetting these obligations, it had cash of CN¥419.0m as well as receivables valued at CN¥46.4m due within 12 months. So its liabilities total CN¥102.9m more than the combination of its cash and short-term receivables.

Having regard to Jiangxi Bestoo EnergyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥7.31b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Jiangxi Bestoo EnergyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Jiangxi Bestoo EnergyLtd grew its EBIT by 40% 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 you can't view debt in total isolation; since Jiangxi Bestoo EnergyLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jiangxi Bestoo EnergyLtd 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. During the last three years, Jiangxi Bestoo EnergyLtd produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jiangxi Bestoo EnergyLtd has CN¥45.1m in net cash. And it impressed us with its EBIT growth of 40% over the last year. So we don't think Jiangxi Bestoo EnergyLtd's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jiangxi Bestoo EnergyLtd's earnings per share history for free.

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.