Guangxi Huaxi Nonferrous MetalLtd (SHSE:600301) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Guangxi Huaxi Nonferrous Metal Co.,Ltd (SHSE:600301) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangxi Huaxi Nonferrous MetalLtd

How Much Debt Does Guangxi Huaxi Nonferrous MetalLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Guangxi Huaxi Nonferrous MetalLtd had CN¥1.31b of debt in March 2024, down from CN¥1.46b, one year before. On the flip side, it has CN¥837.8m in cash leading to net debt of about CN¥477.0m.

A Look At Guangxi Huaxi Nonferrous MetalLtd's Liabilities

According to the last reported balance sheet, Guangxi Huaxi Nonferrous MetalLtd had liabilities of CN¥1.75b due within 12 months, and liabilities of CN¥570.1m due beyond 12 months. On the other hand, it had cash of CN¥837.8m and CN¥212.9m worth of receivables due within a year. So its liabilities total CN¥1.27b more than the combination of its cash and short-term receivables.

Given Guangxi Huaxi Nonferrous MetalLtd has a market capitalization of CN¥12.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Guangxi Huaxi Nonferrous MetalLtd's net debt is only 0.46 times its EBITDA. And its EBIT easily covers its interest expense, being 13.8 times the size. So we're pretty relaxed about its super-conservative use of debt. On top of that, Guangxi Huaxi Nonferrous MetalLtd grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guangxi Huaxi Nonferrous MetalLtd 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Guangxi Huaxi Nonferrous MetalLtd recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

Guangxi Huaxi Nonferrous MetalLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It looks Guangxi Huaxi Nonferrous MetalLtd has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Guangxi Huaxi Nonferrous MetalLtd's earnings per share history for free.

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.