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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jiangxi Jovo Energy Co., Ltd (SHSE:605090) 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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jiangxi Jovo Energy's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Jiangxi Jovo Energy had debt of CN¥3.90b, up from CN¥3.59b in one year. But on the other hand it also has CN¥5.81b in cash, leading to a CN¥1.90b net cash position.

A Look At Jiangxi Jovo Energy's Liabilities

According to the last reported balance sheet, Jiangxi Jovo Energy had liabilities of CN¥2.70b due within 12 months, and liabilities of CN¥3.01b due beyond 12 months. Offsetting this, it had CN¥5.81b in cash and CN¥854.9m in receivables that were due within 12 months. So it can boast CN¥945.8m 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!

Another good sign is that Jiangxi Jovo Energy has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangxi Jovo Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangxi Jovo Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Jiangxi Jovo Energy's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangxi Jovo Energy has CN¥1.90b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 23% over the last year. 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. For instance, we've identified 2 warning signs for Jiangxi Jovo Energy (1 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.