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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jiangxi Bestoo Energy Co.,Ltd. (SZSE:001376) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangxi Bestoo EnergyLtd's Debt?

As you can see below, Jiangxi Bestoo EnergyLtd had CN¥260.0m of debt at June 2024, down from CN¥377.1m a year prior. But it also has CN¥271.3m in cash to offset that, meaning it has CN¥11.3m net cash.

A Look At Jiangxi Bestoo EnergyLtd's Liabilities

According to the last reported balance sheet, Jiangxi Bestoo EnergyLtd had liabilities of CN¥414.2m due within 12 months, and liabilities of CN¥27.6m due beyond 12 months. On the other hand, it had cash of CN¥271.3m and CN¥39.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥131.0m.

This state of affairs indicates that Jiangxi Bestoo EnergyLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥7.51b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Jiangxi Bestoo EnergyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Jiangxi Bestoo EnergyLtd has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangxi Bestoo EnergyLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangxi Bestoo EnergyLtd 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. During the last three years, Jiangxi Bestoo EnergyLtd produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Jiangxi Bestoo EnergyLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥11.3m. And it impressed us with its EBIT growth of 37% over the last year. So is Jiangxi Bestoo EnergyLtd's debt a risk? It doesn't seem so to us. 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 Bestoo EnergyLtd is showing 1 warning sign 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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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.