Is JCHX Mining ManagementLtd (SHSE:603979) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, JCHX Mining Management Co.,Ltd. (SHSE:603979) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for JCHX Mining ManagementLtd

What Is JCHX Mining ManagementLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 JCHX Mining ManagementLtd had CN¥2.85b of debt, an increase on CN¥2.19b, over one year. However, it does have CN¥1.64b in cash offsetting this, leading to net debt of about CN¥1.21b.

How Strong Is JCHX Mining ManagementLtd's Balance Sheet?

The latest balance sheet data shows that JCHX Mining ManagementLtd had liabilities of CN¥3.63b due within a year, and liabilities of CN¥2.44b falling due after that. Offsetting these obligations, it had cash of CN¥1.64b as well as receivables valued at CN¥3.63b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥795.3m.

Since publicly traded JCHX Mining ManagementLtd shares are worth a total of CN¥25.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

JCHX Mining ManagementLtd has a low net debt to EBITDA ratio of only 0.55. And its EBIT covers its interest expense a whopping 11.5 times over. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that JCHX Mining ManagementLtd has boosted its EBIT by 92%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine JCHX Mining ManagementLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, JCHX Mining ManagementLtd 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.

Our View

JCHX Mining ManagementLtd's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that JCHX Mining ManagementLtd can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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 JCHX Mining ManagementLtd you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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