Is Jutal Offshore Oil Services (HKG:3303) A Risky Investment?

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. Importantly, Jutal Offshore Oil Services Limited (HKG:3303) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jutal Offshore Oil Services

How Much Debt Does Jutal Offshore Oil Services Carry?

As you can see below, at the end of June 2022, Jutal Offshore Oil Services had CN¥690.0m of debt, up from CN¥501.0m a year ago. Click the image for more detail. However, it does have CN¥721.9m in cash offsetting this, leading to net cash of CN¥31.9m.

How Healthy Is Jutal Offshore Oil Services' Balance Sheet?

According to the last reported balance sheet, Jutal Offshore Oil Services had liabilities of CN¥1.35b due within 12 months, and liabilities of CN¥509.4m due beyond 12 months. Offsetting this, it had CN¥721.9m in cash and CN¥832.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥306.3m.

This deficit isn't so bad because Jutal Offshore Oil Services is worth CN¥873.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Jutal Offshore Oil Services boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jutal Offshore Oil Services's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jutal Offshore Oil Services made a loss at the EBIT level, and saw its revenue drop to CN¥3.1b, which is a fall of 29%. To be frank that doesn't bode well.

So How Risky Is Jutal Offshore Oil Services?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Jutal Offshore Oil Services lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥4.6m and booked a CN¥228m accounting loss. With only CN¥31.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 Jutal Offshore Oil Services (of which 1 shouldn't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.