Is Hainan Mining (SHSE:601969) A Risky Investment?

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. We note that Hainan Mining Co., Ltd. (SHSE:601969) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hainan Mining

What Is Hainan Mining's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hainan Mining had CN¥2.26b of debt, an increase on CN¥1.63b, over one year. However, its balance sheet shows it holds CN¥3.24b in cash, so it actually has CN¥981.7m net cash.

How Healthy Is Hainan Mining's Balance Sheet?

The latest balance sheet data shows that Hainan Mining had liabilities of CN¥3.80b due within a year, and liabilities of CN¥1.14b falling due after that. On the other hand, it had cash of CN¥3.24b and CN¥1.07b worth of receivables due within a year. So it has liabilities totalling CN¥631.6m more than its cash and near-term receivables, combined.

Given Hainan Mining has a market capitalization of CN¥14.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Hainan Mining 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 Hainan Mining has boosted its EBIT by 63%, 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 Hainan Mining'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hainan 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. In the last three years, Hainan Mining's free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Hainan Mining's liabilities, but we can be reassured by the fact it has has net cash of CN¥981.7m. And it impressed us with its EBIT growth of 63% over the last year. So we don't think Hainan Mining's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hainan Mining you should know about.

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.