Jinduicheng Molybdenum (SHSE:601958) Seems To Use Debt Rather Sparingly

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.' 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. As with many other companies Jinduicheng Molybdenum Co., Ltd. (SHSE:601958) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jinduicheng Molybdenum

What Is Jinduicheng Molybdenum's Net Debt?

As you can see below, at the end of September 2023, Jinduicheng Molybdenum had CN¥102.5m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.67b in cash to offset that, meaning it has CN¥1.57b net cash.

A Look At Jinduicheng Molybdenum's Liabilities

Zooming in on the latest balance sheet data, we can see that Jinduicheng Molybdenum had liabilities of CN¥1.60b due within 12 months and liabilities of CN¥572.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.67b as well as receivables valued at CN¥3.01b due within 12 months. So it can boast CN¥2.51b 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. Simply put, the fact that Jinduicheng Molybdenum has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Jinduicheng Molybdenum grew its EBIT by 116% over twelve months. That boost will make it even easier to pay down debt going forward. 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Jinduicheng Molybdenum 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. During the last three years, Jinduicheng Molybdenum generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jinduicheng Molybdenum has CN¥1.57b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in CN¥2.3b. So is Jinduicheng Molybdenum's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Jinduicheng Molybdenum has 1 warning sign we think 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.