Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Geo-Jade Petroleum Corporation (SHSE:600759) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Geo-Jade Petroleum's Debt?

As you can see below, Geo-Jade Petroleum had CN¥636.0m of debt at September 2024, down from CN¥3.48b a year prior. But it also has CN¥814.0m in cash to offset that, meaning it has CN¥177.9m net cash.

How Healthy Is Geo-Jade Petroleum's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Geo-Jade Petroleum had liabilities of CN¥1.06b due within 12 months and liabilities of CN¥2.77b due beyond that. Offsetting this, it had CN¥814.0m in cash and CN¥265.5m in receivables that were due within 12 months. So its liabilities total CN¥2.76b more than the combination of its cash and short-term receivables.

Geo-Jade Petroleum has a market capitalization of CN¥13.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Geo-Jade Petroleum also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Geo-Jade Petroleum's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Geo-Jade Petroleum will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Geo-Jade Petroleum 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. Looking at the most recent three years, Geo-Jade Petroleum recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Geo-Jade Petroleum does have more liabilities than liquid assets, it also has net cash of CN¥177.9m. So we are not troubled with Geo-Jade Petroleum's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Geo-Jade Petroleum you should be aware of, and 1 of them shouldn't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.