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

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Chifeng Jilong Gold Mining Co.,Ltd. (SHSE:600988) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Chifeng Jilong Gold MiningLtd

What Is Chifeng Jilong Gold MiningLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Chifeng Jilong Gold MiningLtd had debt of CN¥2.26b at the end of September 2024, a reduction from CN¥2.53b over a year. However, it does have CN¥2.45b in cash offsetting this, leading to net cash of CN¥192.6m.

How Healthy 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¥4.60b falling due within a year, and liabilities of CN¥5.50b due beyond that. Offsetting this, it had CN¥2.45b in cash and CN¥1.02b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.62b.

While this might seem like a lot, it is not so bad since Chifeng Jilong Gold MiningLtd has a market capitalization of CN¥28.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Chifeng Jilong Gold MiningLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Chifeng Jilong Gold MiningLtd grew its EBIT by 151% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Chifeng Jilong Gold MiningLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Chifeng Jilong Gold MiningLtd created free cash flow amounting to 2.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Chifeng Jilong Gold MiningLtd does have more liabilities than liquid assets, it also has net cash of CN¥192.6m. And we liked the look of last year's 151% year-on-year EBIT growth. So we don't have any problem with Chifeng Jilong Gold MiningLtd's use of debt. 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.

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.