Shanxi Coking Coal Energy Group (SZSE:000983) Seems To Use Debt Quite Sensibly

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. We can see that Shanxi Coking Coal Energy Group Co., Ltd. (SZSE:000983) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shanxi Coking Coal Energy Group

How Much Debt Does Shanxi Coking Coal Energy Group Carry?

As you can see below, Shanxi Coking Coal Energy Group had CN¥7.92b of debt at September 2024, down from CN¥11.5b a year prior. However, its balance sheet shows it holds CN¥15.3b in cash, so it actually has CN¥7.37b net cash.

A Look At Shanxi Coking Coal Energy Group's Liabilities

We can see from the most recent balance sheet that Shanxi Coking Coal Energy Group had liabilities of CN¥20.8b falling due within a year, and liabilities of CN¥20.0b due beyond that. On the other hand, it had cash of CN¥15.3b and CN¥4.56b worth of receivables due within a year. So it has liabilities totalling CN¥21.0b more than its cash and near-term receivables, combined.

Shanxi Coking Coal Energy Group has a market capitalization of CN¥46.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Shanxi Coking Coal Energy Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Shanxi Coking Coal Energy Group's load is not too heavy, because its EBIT was down 48% 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 ultimately the future profitability of the business will decide if Shanxi Coking Coal Energy Group can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. While Shanxi Coking Coal Energy Group 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, Shanxi Coking Coal Energy Group generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Shanxi Coking Coal Energy Group'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¥7.37b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in CN¥5.1b. So we are not troubled with Shanxi Coking Coal Energy Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shanxi Coking Coal Energy Group 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.