Is JX Energy (HKG:3395) A Risky Investment?

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 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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for JX Energy

What Is JX Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that JX Energy had CA$18.1m of debt in March 2023, down from CA$23.2m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is JX Energy's Balance Sheet?

The latest balance sheet data shows that JX Energy had liabilities of CA$13.0m due within a year, and liabilities of CA$30.3m falling due after that. On the other hand, it had cash of CA$259.6k and CA$1.41m worth of receivables due within a year. So it has liabilities totalling CA$41.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$24.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, JX Energy would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is JX Energy'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.

In the last year JX Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 2.1%, to CA$21m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, JX Energy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$2.0m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CA$8.7m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with JX Energy , and understanding them should be part of your investment process.

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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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.