Is Tibet Summit ResourcesLtd (SHSE:600338) Using Too Much Debt?

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 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 Tibet Summit Resources Co.,Ltd. (SHSE:600338) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tibet Summit ResourcesLtd

What Is Tibet Summit ResourcesLtd's Net Debt?

As you can see below, at the end of March 2024, Tibet Summit ResourcesLtd had CN¥281.3m of debt, up from CN¥244.8m a year ago. Click the image for more detail. However, it also had CN¥6.13m in cash, and so its net debt is CN¥275.2m.

How Strong Is Tibet Summit ResourcesLtd's Balance Sheet?

The latest balance sheet data shows that Tibet Summit ResourcesLtd had liabilities of CN¥2.33b due within a year, and liabilities of CN¥32.5m falling due after that. Offsetting this, it had CN¥6.13m in cash and CN¥105.0m in receivables that were due within 12 months. So its liabilities total CN¥2.25b more than the combination of its cash and short-term receivables.

Tibet Summit ResourcesLtd has a market capitalization of CN¥8.65b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tibet Summit ResourcesLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Tibet Summit ResourcesLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Tibet Summit ResourcesLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥47m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥217m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Tibet Summit ResourcesLtd 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.

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