These 4 Measures Indicate That Jintai Energy Holdings (HKG:2728) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Jintai Energy Holdings Limited (HKG:2728) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the HK Oil and Gas industry.

How Much Debt Does Jintai Energy Holdings Carry?

The chart below, which you can click on for greater detail, shows that Jintai Energy Holdings had HK$441.6m in debt in June 2022; about the same as the year before. But on the other hand it also has HK$613.5m in cash, leading to a HK$171.9m net cash position.

A Look At Jintai Energy Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Jintai Energy Holdings had liabilities of HK$560.3m due within 12 months and liabilities of HK$32.0m due beyond that. On the other hand, it had cash of HK$613.5m and HK$129.1m worth of receivables due within a year. So it can boast HK$150.4m more liquid assets than total liabilities.

This luscious liquidity implies that Jintai Energy Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Jintai Energy Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Jintai Energy Holdings's load is not too heavy, because its EBIT was down 78% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jintai Energy Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jintai Energy Holdings 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. Happily for any shareholders, Jintai Energy Holdings actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jintai Energy Holdings has HK$171.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$494m, being 294% of its EBIT. So is Jintai Energy Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jintai Energy Holdings you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.