We Think Jutal Offshore Oil Services (HKG:3303) Can Stay On Top Of Its Debt

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.' 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 the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jutal Offshore Oil Services

How Much Debt Does Jutal Offshore Oil Services Carry?

You can click the graphic below for the historical numbers, but it shows that Jutal Offshore Oil Services had CN¥519.7m of debt in December 2020, down from CN¥682.0m, one year before. But on the other hand it also has CN¥1.27b in cash, leading to a CN¥750.6m net cash position.

A Look At Jutal Offshore Oil Services' Liabilities

We can see from the most recent balance sheet that Jutal Offshore Oil Services had liabilities of CN¥1.76b falling due within a year, and liabilities of CN¥595.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.27b as well as receivables valued at CN¥1.27b due within 12 months. So it can boast CN¥188.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Jutal Offshore Oil Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jutal Offshore Oil Services has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Jutal Offshore Oil Services grew its EBIT by 236% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jutal Offshore Oil Services's earnings that will influence how the balance sheet holds up in the future. 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. 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. Considering the last three years, Jutal Offshore Oil Services actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case Jutal Offshore Oil Services has CN¥750.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 236% over the last year. So we don't have any problem with Jutal Offshore Oil Services's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Jutal Offshore Oil Services that you should be aware of.

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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