We Think Shanxi Coal International Energy GroupLtd (SHSE:600546) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 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?

Why Does Debt Bring Risk?

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, 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.

See our latest analysis for Shanxi Coal International Energy GroupLtd

What Is Shanxi Coal International Energy GroupLtd's Debt?

As you can see below, at the end of September 2024, Shanxi Coal International Energy GroupLtd had CN¥8.56b of debt, up from CN¥6.40b a year ago. Click the image for more detail. But it also has CN¥9.28b in cash to offset that, meaning it has CN¥717.9m net cash.

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

According to the last reported balance sheet, Shanxi Coal International Energy GroupLtd had liabilities of CN¥11.5b due within 12 months, and liabilities of CN¥11.7b due beyond 12 months. On the other hand, it had cash of CN¥9.28b and CN¥542.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥13.3b.

Shanxi Coal International Energy GroupLtd has a market capitalization of CN¥24.2b, 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. 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!

It is just as well that Shanxi Coal International Energy GroupLtd's load is not too heavy, because its EBIT was down 55% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 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. Shanxi Coal International Energy GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Shanxi Coal International Energy GroupLtd recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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¥717.9m. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in CN¥2.5b. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shanxi Coal International Energy GroupLtd has 2 warning signs we think 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.