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 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 can see that Jiangxi Jovo Energy Co., Ltd (SHSE:605090) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Jiangxi Jovo Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangxi Jovo Energy had CN¥4.06b of debt, an increase on CN¥3.64b, over one year. However, its balance sheet shows it holds CN¥5.57b in cash, so it actually has CN¥1.51b net cash.

A Look At Jiangxi Jovo Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangxi Jovo Energy had liabilities of CN¥3.14b due within 12 months and liabilities of CN¥3.04b due beyond that. Offsetting this, it had CN¥5.57b in cash and CN¥1.13b in receivables that were due within 12 months. So it actually has CN¥515.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangxi Jovo Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangxi Jovo Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jiangxi Jovo Energy grew its EBIT by 31% 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 ultimately the future profitability of the business will decide if Jiangxi Jovo Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangxi Jovo 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, Jiangxi Jovo Energy's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangxi Jovo Energy has CN¥1.51b in net cash and a decent-looking balance sheet. And we liked the look of last year's 31% year-on-year EBIT growth. So we don't think Jiangxi Jovo Energy's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jiangxi Jovo Energy is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com