Jinduicheng Molybdenum (SHSE:601958) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Jinduicheng Molybdenum Co., Ltd. (SHSE:601958) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jinduicheng Molybdenum

What Is Jinduicheng Molybdenum's Net Debt?

As you can see below, at the end of March 2024, Jinduicheng Molybdenum had CN¥84.4m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.20b in cash, so it actually has CN¥4.12b net cash.

How Strong Is Jinduicheng Molybdenum's Balance Sheet?

The latest balance sheet data shows that Jinduicheng Molybdenum had liabilities of CN¥1.35b due within a year, and liabilities of CN¥658.0m falling due after that. Offsetting this, it had CN¥4.20b in cash and CN¥2.04b in receivables that were due within 12 months. So it can boast CN¥4.22b more liquid assets than total liabilities.

This surplus suggests that Jinduicheng Molybdenum has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jinduicheng Molybdenum boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Jinduicheng Molybdenum has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jinduicheng Molybdenum can strengthen its balance sheet over time. 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. While Jinduicheng Molybdenum 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. Over the last three years, Jinduicheng Molybdenum recorded free cash flow worth a fulsome 86% 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 we empathize with investors who find debt concerning, you should keep in mind that Jinduicheng Molybdenum has net cash of CN¥4.12b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.2b, being 86% of its EBIT. So we don't think Jinduicheng Molybdenum's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jinduicheng Molybdenum you should know about.

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.

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