Is Guangxi Huaxi Nonferrous MetalLtd (SHSE:600301) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Guangxi Huaxi Nonferrous Metal Co.,Ltd (SHSE:600301) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Guangxi Huaxi Nonferrous MetalLtd

What Is Guangxi Huaxi Nonferrous MetalLtd's Debt?

As you can see below, Guangxi Huaxi Nonferrous MetalLtd had CN¥1.32b of debt at March 2024, down from CN¥1.46b a year prior. On the flip side, it has CN¥837.8m in cash leading to net debt of about CN¥481.3m.

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 it has liabilities totalling CN¥1.27b more than its cash and near-term receivables, combined.

Given Guangxi Huaxi Nonferrous MetalLtd has a market capitalization of CN¥9.57b, 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 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 has a low net debt to EBITDA ratio of only 0.46. 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. In addition to that, we're happy to report that Guangxi Huaxi Nonferrous MetalLtd has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. 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 we always check how much of that EBIT is translated into 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 puts it in a very strong position to pay down debt.

Our View

The good news is that Guangxi Huaxi Nonferrous MetalLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. It looks Guangxi Huaxi Nonferrous MetalLtd has no trouble standing on its own two feet, and it has no reason to fear its lenders. For investing nerds like us its balance sheet is almost charming. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.