These 4 Measures Indicate That Shanxi Coking Coal Energy Group (SZSE:000983) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Shanxi Coking Coal Energy Group Co., Ltd. (SZSE:000983) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shanxi Coking Coal Energy Group

What Is Shanxi Coking Coal Energy Group's Debt?

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.

How Strong Is Shanxi Coking Coal Energy Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanxi Coking Coal Energy Group had liabilities of CN¥20.8b due within 12 months 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 its liabilities total CN¥21.0b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shanxi Coking Coal Energy Group is worth CN¥39.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

In fact Shanxi Coking Coal Energy Group's saving grace is its low debt levels, because its EBIT has tanked 48% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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'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 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

While Shanxi Coking Coal Energy Group does have more liabilities than liquid assets, it also 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 don't have any problem with Shanxi Coking Coal Energy Group's use of debt. 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 Shanxi Coking Coal Energy Group that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.