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.' 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. We can see that Shanxi Coal International Energy Group Co.,Ltd (SHSE:600546) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanxi Coal International Energy GroupLtd

How Much Debt Does Shanxi Coal International Energy GroupLtd Carry?

As you can see below, at the end of June 2024, Shanxi Coal International Energy GroupLtd had CN¥8.76b of debt, up from CN¥7.08b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥9.73b in cash, so it actually has CN¥974.8m net cash.

How Strong Is Shanxi Coal International Energy GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Shanxi Coal International Energy GroupLtd had liabilities of CN¥11.3b falling due within a year, and liabilities of CN¥11.3b due beyond that. On the other hand, it had cash of CN¥9.73b and CN¥611.0m worth of receivables due within a year. So it has liabilities totalling CN¥12.2b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shanxi Coal International Energy GroupLtd is worth CN¥20.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Shanxi Coal International Energy GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shanxi Coal International Energy GroupLtd if management cannot prevent a repeat of the 60% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Shanxi Coal International Energy GroupLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥974.8m. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in CN¥3.4b. So we don't have any problem with Shanxi Coal International Energy GroupLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Shanxi Coal International Energy GroupLtd that you should be aware of before investing here.

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.

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

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.