Inner Mongolia Xingye Silver &Tin MiningLtd (SZSE:000426) Has A Pretty Healthy Balance Sheet

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.' 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 Inner Mongolia Xingye Silver &Tin Mining Co.,Ltd (SZSE:000426) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

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

What Is Inner Mongolia Xingye Silver &Tin MiningLtd's Debt?

The image below, which you can click on for greater detail, shows that Inner Mongolia Xingye Silver &Tin MiningLtd had debt of CN¥1.70b at the end of September 2023, a reduction from CN¥1.89b over a year. However, because it has a cash reserve of CN¥79.1m, its net debt is less, at about CN¥1.62b.

How Healthy 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¥2.71b due within 12 months and liabilities of CN¥1.77b due beyond that. Offsetting this, it had CN¥79.1m in cash and CN¥58.1m in receivables that were due within 12 months. So its liabilities total CN¥4.34b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Inner Mongolia Xingye Silver &Tin MiningLtd has a market capitalization of CN¥20.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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 1.4. And its EBIT covers its interest expense a whopping 11.9 times over. So we're pretty relaxed about its super-conservative use of debt. On top of that, Inner Mongolia Xingye Silver &Tin MiningLtd grew its EBIT by 92% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Inner Mongolia Xingye Silver &Tin MiningLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Inner Mongolia Xingye Silver &Tin MiningLtd produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Inner Mongolia Xingye Silver &Tin MiningLtd's impressive EBIT growth rate implies it has the upper hand on its debt. And the good news does not stop there, as its interest cover also supports that impression! Looking at the bigger picture, we think Inner Mongolia Xingye Silver &Tin MiningLtd's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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.

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.