We Think Huaibei Mining HoldingsLtd (SHSE:600985) Can Stay On Top Of Its 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Huaibei Mining Holdings Co.,Ltd. (SHSE:600985) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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¥5.71b of debt at June 2024, down from CN¥12.2b a year prior. However, its balance sheet shows it holds CN¥6.05b in cash, so it actually has CN¥341.0m net cash.

How Strong Is Huaibei Mining HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, Huaibei Mining HoldingsLtd had liabilities of CN¥28.4b due within 12 months, and liabilities of CN¥14.7b due beyond 12 months. Offsetting this, it had CN¥6.05b in cash and CN¥6.04b in receivables that were due within 12 months. So it has liabilities totalling CN¥31.0b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥44.8b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

In fact Huaibei Mining HoldingsLtd's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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 85% 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

While Huaibei Mining HoldingsLtd does have more liabilities than liquid assets, it also has net cash of CN¥341.0m. And it impressed us with free cash flow of CN¥3.0b, being 85% of its EBIT. So we don't have any problem with Huaibei Mining HoldingsLtd's use of debt. 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. We've identified 2 warning signs with Huaibei Mining HoldingsLtd , and understanding them should be part of your investment process.

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.