Chifeng Jilong Gold MiningLtd (SHSE:600988) Has A Pretty Healthy Balance Sheet

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. As with many other companies Chifeng Jilong Gold Mining Co.,Ltd. (SHSE:600988) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Chifeng Jilong Gold MiningLtd

What Is Chifeng Jilong Gold MiningLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Chifeng Jilong Gold MiningLtd had CN¥2.79b of debt, an increase on CN¥2.31b, over one year. However, it also had CN¥1.79b in cash, and so its net debt is CN¥997.3m.

How Strong Is Chifeng Jilong Gold MiningLtd's Balance Sheet?

We can see from the most recent balance sheet that Chifeng Jilong Gold MiningLtd had liabilities of CN¥3.60b falling due within a year, and liabilities of CN¥6.30b due beyond that. Offsetting these obligations, it had cash of CN¥1.79b as well as receivables valued at CN¥621.0m due within 12 months. So its liabilities total CN¥7.49b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Chifeng Jilong Gold MiningLtd is worth CN¥29.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Chifeng Jilong Gold MiningLtd has net debt of just 0.32 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 8.8 times the interest expense over the last year. In addition to that, we're happy to report that Chifeng Jilong Gold MiningLtd has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chifeng Jilong Gold MiningLtd 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Chifeng Jilong Gold MiningLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Both Chifeng Jilong Gold MiningLtd's ability to to grow its EBIT and its net debt to EBITDA gave us comfort that it can handle its debt. In contrast, our confidence was undermined by its apparent struggle to convert EBIT to free cash flow. Considering this range of data points, we think Chifeng Jilong Gold MiningLtd is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. Over time, share prices tend to follow earnings per share, so if you're interested in Chifeng Jilong Gold MiningLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.