Shanxi Coal International Energy GroupLtd (SHSE:600546) Has A Pretty Healthy Balance Sheet

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.' 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 note that Shanxi Coal International Energy Group Co.,Ltd (SHSE:600546) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shanxi Coal International Energy GroupLtd

What Is Shanxi Coal International Energy GroupLtd's Net Debt?

As you can see below, Shanxi Coal International Energy GroupLtd had CN¥5.42b of debt at December 2023, down from CN¥7.18b a year prior. However, it does have CN¥6.37b in cash offsetting this, leading to net cash of CN¥955.7m.

A Look At Shanxi Coal International Energy GroupLtd's Liabilities

According to the last reported balance sheet, Shanxi Coal International Energy GroupLtd had liabilities of CN¥12.5b due within 12 months, and liabilities of CN¥7.57b due beyond 12 months. Offsetting this, it had CN¥6.37b in cash and CN¥601.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥13.1b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Shanxi Coal International Energy GroupLtd has a market capitalization of CN¥31.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Shanxi Coal International Energy GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Shanxi Coal International Energy GroupLtd if management cannot prevent a repeat of the 38% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanxi Coal International Energy GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanxi Coal International Energy GroupLtd 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, Shanxi Coal International Energy GroupLtd generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Shanxi Coal International Energy GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥955.7m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in CN¥4.0b. So we are not troubled with Shanxi Coal International Energy GroupLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shanxi Coal International Energy GroupLtd you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.