Is Chifeng Jilong Gold MiningLtd (SHSE:600988) A Risky Investment?

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.' 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 Chifeng Jilong Gold Mining Co.,Ltd. (SHSE:600988) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chifeng Jilong Gold MiningLtd

How Much Debt Does Chifeng Jilong Gold MiningLtd Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Chifeng Jilong Gold MiningLtd had debt of CN¥2.49b, up from CN¥2.34b in one year. However, it also had CN¥1.69b in cash, and so its net debt is CN¥797.6m.

A Look At Chifeng Jilong Gold MiningLtd's Liabilities

The latest balance sheet data shows that Chifeng Jilong Gold MiningLtd had liabilities of CN¥3.72b due within a year, and liabilities of CN¥6.45b falling due after that. On the other hand, it had cash of CN¥1.69b and CN¥608.8m worth of receivables due within a year. So its liabilities total CN¥7.87b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Chifeng Jilong Gold MiningLtd has a market capitalization of CN¥30.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Chifeng Jilong Gold MiningLtd has net debt of just 0.27 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 8.3 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 54%, thus reducing the spectre of future debt repayments. 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 Chifeng Jilong Gold MiningLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Chifeng Jilong Gold MiningLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen Chifeng Jilong Gold MiningLtd is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its EBIT growth rate. Considering this range of data points, we think Chifeng Jilong Gold MiningLtd is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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.