Jinneng Holding Shanxi Coal Industryltd (SHSE:601001) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Jinneng Holding Shanxi Coal Industry Co.,ltd. (SHSE:601001) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Jinneng Holding Shanxi Coal Industryltd

How Much Debt Does Jinneng Holding Shanxi Coal Industryltd Carry?

As you can see below, Jinneng Holding Shanxi Coal Industryltd had CN¥5.88b of debt at March 2024, down from CN¥7.92b a year prior. However, its balance sheet shows it holds CN¥16.1b in cash, so it actually has CN¥10.2b net cash.

A Look At Jinneng Holding Shanxi Coal Industryltd's Liabilities

The latest balance sheet data shows that Jinneng Holding Shanxi Coal Industryltd had liabilities of CN¥9.25b due within a year, and liabilities of CN¥3.52b falling due after that. On the other hand, it had cash of CN¥16.1b and CN¥1.63b worth of receivables due within a year. So it can boast CN¥4.95b more liquid assets than total liabilities.

It's good to see that Jinneng Holding Shanxi Coal Industryltd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Jinneng Holding Shanxi Coal Industryltd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Jinneng Holding Shanxi Coal Industryltd saw its EBIT drop by 4.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jinneng Holding Shanxi Coal Industryltd'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 Jinneng Holding Shanxi Coal Industryltd 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, Jinneng Holding Shanxi Coal Industryltd generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jinneng Holding Shanxi Coal Industryltd has CN¥10.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥4.6b, being 87% of its EBIT. So we don't think Jinneng Holding Shanxi Coal Industryltd's use of debt is risky. 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. For example, we've discovered 1 warning sign for Jinneng Holding Shanxi Coal Industryltd that you should be aware of before investing here.

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.