Jutal Offshore Oil Services (HKG:3303) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Jutal Offshore Oil Services Limited (HKG:3303) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Jutal Offshore Oil Services

How Much Debt Does Jutal Offshore Oil Services Carry?

As you can see below, Jutal Offshore Oil Services had CN¥491.3m of debt at June 2020, down from CN¥557.6m a year prior. But it also has CN¥1.00b in cash to offset that, meaning it has CN¥513.0m net cash.

A Look At Jutal Offshore Oil Services's Liabilities

We can see from the most recent balance sheet that Jutal Offshore Oil Services had liabilities of CN¥1.48b falling due within a year, and liabilities of CN¥562.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.00b as well as receivables valued at CN¥948.6m due within 12 months. So its liabilities total CN¥91.6m more than the combination of its cash and short-term receivables.

Given Jutal Offshore Oil Services has a market capitalization of CN¥715.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

Importantly, Jutal Offshore Oil Services grew its EBIT by 94% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jutal Offshore Oil Services 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. Jutal Offshore Oil Services 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. Over the last three years, Jutal Offshore Oil Services saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although Jutal Offshore Oil Services's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥513.0m. And we liked the look of last year's 94% year-on-year EBIT growth. So we are not troubled with Jutal Offshore Oil Services's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Jutal Offshore Oil Services insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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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