Is Pengxin International MiningLtd (SHSE:600490) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Pengxin International Mining Co.,Ltd (SHSE:600490) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Pengxin International MiningLtd

What Is Pengxin International MiningLtd's Net Debt?

As you can see below, Pengxin International MiningLtd had CN¥700.1m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥1.15b in cash to offset that, meaning it has CN¥453.6m net cash.

A Look At Pengxin International MiningLtd's Liabilities

The latest balance sheet data shows that Pengxin International MiningLtd had liabilities of CN¥1.65b due within a year, and liabilities of CN¥132.8m falling due after that. Offsetting this, it had CN¥1.15b in cash and CN¥254.9m in receivables that were due within 12 months. So its liabilities total CN¥375.6m more than the combination of its cash and short-term receivables.

Given Pengxin International MiningLtd has a market capitalization of CN¥6.28b, 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. Despite its noteworthy liabilities, Pengxin International MiningLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Pengxin International MiningLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Pengxin International MiningLtd made a loss at the EBIT level, and saw its revenue drop to CN¥3.5b, which is a fall of 59%. To be frank that doesn't bode well.

So How Risky Is Pengxin International MiningLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Pengxin International MiningLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥347m and booked a CN¥191m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥453.6m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Pengxin International MiningLtd you should know about.

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.

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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.