These 4 Measures Indicate That Inner Mongolia Xingye Silver &Tin MiningLtd (SZSE:000426) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Inner Mongolia Xingye Silver &Tin Mining Co.,Ltd (SZSE:000426) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider 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 Net Debt?

As you can see below, Inner Mongolia Xingye Silver &Tin MiningLtd had CN¥1.61b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥521.4m in cash offsetting this, leading to net debt of about CN¥1.08b.

A Look At Inner Mongolia Xingye Silver &Tin MiningLtd's Liabilities

The latest balance sheet data shows that Inner Mongolia Xingye Silver &Tin MiningLtd had liabilities of CN¥2.54b due within a year, and liabilities of CN¥1.09b falling due after that. Offsetting this, it had CN¥521.4m in cash and CN¥459.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.64b.

Since publicly traded Inner Mongolia Xingye Silver &Tin MiningLtd shares are worth a total of CN¥22.3b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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 0.39. And its EBIT covers its interest expense a whopping 18.1 times over. 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 165% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Inner Mongolia Xingye Silver &Tin MiningLtd recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

The good news is that Inner Mongolia Xingye Silver &Tin MiningLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! Overall, we don't think Inner Mongolia Xingye Silver &Tin MiningLtd is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. 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.