Is Jinneng Holding Shanxi Coal Industryltd (SHSE:601001) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Jinneng Holding Shanxi Coal Industry Co.,ltd. (SHSE:601001) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jinneng Holding Shanxi Coal Industryltd

How Much Debt Does Jinneng Holding Shanxi Coal Industryltd Carry?

The image below, which you can click on for greater detail, shows that Jinneng Holding Shanxi Coal Industryltd had debt of CN¥5.14b at the end of September 2023, a reduction from CN¥9.20b over a year. However, its balance sheet shows it holds CN¥15.5b in cash, so it actually has CN¥10.3b net cash.

How Strong Is Jinneng Holding Shanxi Coal Industryltd's Balance Sheet?

The latest balance sheet data shows that Jinneng Holding Shanxi Coal Industryltd had liabilities of CN¥10.0b due within a year, and liabilities of CN¥4.24b falling due after that. Offsetting these obligations, it had cash of CN¥15.5b as well as receivables valued at CN¥1.97b due within 12 months. So it actually has CN¥3.16b more liquid assets than total liabilities.

This surplus suggests that Jinneng Holding Shanxi Coal Industryltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jinneng Holding Shanxi Coal Industryltd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Jinneng Holding Shanxi Coal Industryltd's saving grace is its low debt levels, because its EBIT has tanked 58% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jinneng Holding Shanxi Coal Industryltd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jinneng Holding Shanxi Coal Industryltd 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 last three years, Jinneng Holding Shanxi Coal Industryltd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jinneng Holding Shanxi Coal Industryltd has net cash of CN¥10.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥5.9b, being 103% of its EBIT. So we are not troubled with Jinneng Holding Shanxi Coal Industryltd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Jinneng Holding Shanxi Coal Industryltd that 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.