Is Shaanxi Coal Industry (SHSE:601225) Using Too Much 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shaanxi Coal Industry Company Limited (SHSE:601225) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shaanxi Coal Industry

How Much Debt Does Shaanxi Coal Industry Carry?

The image below, which you can click on for greater detail, shows that Shaanxi Coal Industry had debt of CN¥3.98b at the end of June 2024, a reduction from CN¥5.43b over a year. But it also has CN¥37.4b in cash to offset that, meaning it has CN¥33.4b net cash.

How Healthy Is Shaanxi Coal Industry's Balance Sheet?

According to the last reported balance sheet, Shaanxi Coal Industry had liabilities of CN¥42.2b due within 12 months, and liabilities of CN¥29.1b due beyond 12 months. Offsetting this, it had CN¥37.4b in cash and CN¥4.44b in receivables that were due within 12 months. So its liabilities total CN¥29.4b more than the combination of its cash and short-term receivables.

Of course, Shaanxi Coal Industry has a titanic market capitalization of CN¥243.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shaanxi Coal Industry also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Shaanxi Coal Industry's load is not too heavy, because its EBIT was down 21% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shaanxi Coal Industry'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shaanxi Coal Industry 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. During the last three years, Shaanxi Coal Industry generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Shaanxi Coal Industry does have more liabilities than liquid assets, it also has net cash of CN¥33.4b. And it impressed us with free cash flow of CN¥32b, being 86% of its EBIT. So we are not troubled with Shaanxi Coal Industry's debt use. 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 - Shaanxi Coal Industry has 1 warning sign 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.