Henan Jinma Energy (HKG:6885) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Henan Jinma Energy Company Limited (HKG:6885) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Henan Jinma Energy

What Is Henan Jinma Energy's Net Debt?

The image below, which you can click on for greater detail, shows that Henan Jinma Energy had debt of CN¥861.7m at the end of December 2020, a reduction from CN¥1.04b over a year. But it also has CN¥2.26b in cash to offset that, meaning it has CN¥1.40b net cash.

How Strong Is Henan Jinma Energy's Balance Sheet?

The latest balance sheet data shows that Henan Jinma Energy had liabilities of CN¥1.99b due within a year, and liabilities of CN¥416.8m falling due after that. On the other hand, it had cash of CN¥2.26b and CN¥223.7m worth of receivables due within a year. So it can boast CN¥70.4m more liquid assets than total liabilities.

This surplus suggests that Henan Jinma Energy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Henan Jinma Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Henan Jinma Energy saw its EBIT decline by 7.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Henan Jinma 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Henan Jinma Energy 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. In the last three years, Henan Jinma Energy's free cash flow amounted to 27% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Henan Jinma Energy has net cash of CN¥1.40b, as well as more liquid assets than liabilities. So we don't have any problem with Henan Jinma Energy's use of debt. 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. Be aware that Henan Jinma Energy is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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