Is JX Energy (HKG:3395) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that JX Energy Ltd. (HKG:3395) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 JX Energy

What Is JX Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that JX Energy had CA$18.2m of debt in June 2022, down from CA$26.3m, one year before. However, it also had CA$539.1k in cash, and so its net debt is CA$17.7m.

How Healthy Is JX Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JX Energy had liabilities of CA$31.5m due within 12 months and liabilities of CA$8.81m due beyond that. On the other hand, it had cash of CA$539.1k and CA$2.91m worth of receivables due within a year. So it has liabilities totalling CA$36.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$46.3m, so it does suggest shareholders should keep an eye on JX Energy's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since JX Energy 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.

In the last year JX Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to CA$23m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, JX Energy still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$96k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$2.3m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Case in point: We've spotted 5 warning signs for JX Energy you should be aware of, and 1 of them is concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.