Is Huaibei Mining HoldingsLtd (SHSE:600985) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Huaibei Mining Holdings Co.,Ltd. (SHSE:600985) 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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Huaibei Mining HoldingsLtd

How Much Debt Does Huaibei Mining HoldingsLtd Carry?

As you can see below, Huaibei Mining HoldingsLtd had CN¥6.02b of debt at September 2024, down from CN¥11.5b a year prior. But on the other hand it also has CN¥7.20b in cash, leading to a CN¥1.19b net cash position.

How Healthy Is Huaibei Mining HoldingsLtd's Balance Sheet?

The latest balance sheet data shows that Huaibei Mining HoldingsLtd had liabilities of CN¥27.5b due within a year, and liabilities of CN¥15.5b falling due after that. Offsetting these obligations, it had cash of CN¥7.20b as well as receivables valued at CN¥5.28b due within 12 months. So its liabilities total CN¥30.6b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥37.5b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Huaibei Mining HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Huaibei Mining HoldingsLtd's load is not too heavy, because its EBIT was down 22% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Huaibei Mining HoldingsLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Huaibei Mining HoldingsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Huaibei Mining HoldingsLtd recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Huaibei Mining HoldingsLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.19b. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in CN¥3.8b. So we are not troubled with Huaibei Mining HoldingsLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Huaibei Mining HoldingsLtd .

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.