Inner Mongolia Xingye Silver &Tin MiningLtd (SZSE:000426) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Inner Mongolia Xingye Silver &Tin Mining Co.,Ltd (SZSE:000426) does use debt in its business. 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. 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.

Check out our latest analysis for Inner Mongolia Xingye Silver &Tin MiningLtd

How Much Debt Does Inner Mongolia Xingye Silver &Tin MiningLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Inner Mongolia Xingye Silver &Tin MiningLtd had CN¥1.72b of debt in March 2024, down from CN¥1.95b, one year before. However, it does have CN¥607.8m in cash offsetting this, leading to net debt of about CN¥1.11b.

How Strong Is Inner Mongolia Xingye Silver &Tin MiningLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Inner Mongolia Xingye Silver &Tin MiningLtd had liabilities of CN¥2.97b due within 12 months and liabilities of CN¥1.57b due beyond that. On the other hand, it had cash of CN¥607.8m and CN¥397.5m worth of receivables due within a year. So it has liabilities totalling CN¥3.54b more than its cash and near-term receivables, combined.

Of course, Inner Mongolia Xingye Silver &Tin MiningLtd has a market capitalization of CN¥25.8b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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.

Inner Mongolia Xingye Silver &Tin MiningLtd has a low net debt to EBITDA ratio of only 0.53. And its EBIT easily covers its interest expense, being 12.0 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Even more impressive was the fact that Inner Mongolia Xingye Silver &Tin MiningLtd grew its EBIT by 293% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Inner Mongolia Xingye Silver &Tin MiningLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Inner Mongolia Xingye Silver &Tin MiningLtd produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Inner Mongolia Xingye Silver &Tin MiningLtd's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Considering this range of factors, it seems to us that Inner Mongolia Xingye Silver &Tin MiningLtd is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. Over time, share prices tend to follow earnings per share, so if you're interested in Inner Mongolia Xingye Silver &Tin MiningLtd, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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