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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Guangxi Huaxi Nonferrous Metal Co.,Ltd (SHSE:600301) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Guangxi Huaxi Nonferrous MetalLtd

How Much Debt Does Guangxi Huaxi Nonferrous MetalLtd Carry?

The image below, which you can click on for greater detail, shows that Guangxi Huaxi Nonferrous MetalLtd had debt of CN¥1.35b at the end of September 2024, a reduction from CN¥1.70b over a year. On the flip side, it has CN¥1.16b in cash leading to net debt of about CN¥192.6m.

How Strong Is Guangxi Huaxi Nonferrous MetalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangxi Huaxi Nonferrous MetalLtd had liabilities of CN¥1.79b due within 12 months and liabilities of CN¥920.6m due beyond that. Offsetting this, it had CN¥1.16b in cash and CN¥172.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.38b more than its cash and near-term receivables, combined.

Of course, Guangxi Huaxi Nonferrous MetalLtd has a market capitalization of CN¥11.8b, 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Guangxi Huaxi Nonferrous MetalLtd's net debt is only 0.14 times its EBITDA. And its EBIT covers its interest expense a whopping 26.3 times over. So we're pretty relaxed about its super-conservative use of debt. On top of that, Guangxi Huaxi Nonferrous MetalLtd grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Guangxi Huaxi Nonferrous MetalLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 91% 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.