Inner Mongolia Yitai CoalLtd (SHSE:900948) Seems To Use Debt Quite Sensibly

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 Inner Mongolia Yitai Coal Co.,Ltd. (SHSE:900948) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Inner Mongolia Yitai CoalLtd

What Is Inner Mongolia Yitai CoalLtd's Debt?

As you can see below, Inner Mongolia Yitai CoalLtd had CN¥14.5b of debt at September 2024, down from CN¥16.4b a year prior. However, its balance sheet shows it holds CN¥15.0b in cash, so it actually has CN¥444.0m net cash.

How Healthy Is Inner Mongolia Yitai CoalLtd's Balance Sheet?

According to the last reported balance sheet, Inner Mongolia Yitai CoalLtd had liabilities of CN¥14.6b due within 12 months, and liabilities of CN¥13.6b due beyond 12 months. Offsetting these obligations, it had cash of CN¥15.0b as well as receivables valued at CN¥1.49b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.7b.

Inner Mongolia Yitai CoalLtd has a market capitalization of CN¥41.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Inner Mongolia Yitai CoalLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Inner Mongolia Yitai CoalLtd's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Inner Mongolia Yitai CoalLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Inner Mongolia Yitai CoalLtd 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, Inner Mongolia Yitai CoalLtd generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Inner Mongolia Yitai CoalLtd does have more liabilities than liquid assets, it also has net cash of CN¥444.0m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in CN¥10.0b. So we don't have any problem with Inner Mongolia Yitai CoalLtd'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. Case in point: We've spotted 1 warning sign for Inner Mongolia Yitai CoalLtd you should be aware of.

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.

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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.