Is Xinjiang Baodi Mining (SHSE:601121) Using Too Much 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 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 Xinjiang Baodi Mining Co., Ltd. (SHSE:601121) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Xinjiang Baodi Mining

How Much Debt Does Xinjiang Baodi Mining Carry?

As you can see below, Xinjiang Baodi Mining had CN¥245.0m of debt at March 2024, down from CN¥265.4m a year prior. But it also has CN¥1.65b in cash to offset that, meaning it has CN¥1.40b net cash.

How Strong Is Xinjiang Baodi Mining's Balance Sheet?

We can see from the most recent balance sheet that Xinjiang Baodi Mining had liabilities of CN¥913.3m falling due within a year, and liabilities of CN¥1.52b due beyond that. Offsetting these obligations, it had cash of CN¥1.65b as well as receivables valued at CN¥115.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥668.8m.

Given Xinjiang Baodi Mining has a market capitalization of CN¥4.77b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Xinjiang Baodi Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Xinjiang Baodi Mining grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xinjiang Baodi Mining's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Xinjiang Baodi Mining 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, Xinjiang Baodi Mining saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Xinjiang Baodi Mining does have more liabilities than liquid assets, it also has net cash of CN¥1.40b. And it impressed us with its EBIT growth of 38% over the last year. So we are not troubled with Xinjiang Baodi Mining's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Xinjiang Baodi Mining you should be aware of.

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.