Is Tibet Mineral Development (SZSE:000762) 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.' 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, Tibet Mineral Development Co., LTD (SZSE:000762) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tibet Mineral Development

What Is Tibet Mineral Development's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Tibet Mineral Development had debt of CN¥1.32b, up from CN¥1.06b in one year. But it also has CN¥1.65b in cash to offset that, meaning it has CN¥329.6m net cash.

How Strong Is Tibet Mineral Development's Balance Sheet?

According to the last reported balance sheet, Tibet Mineral Development had liabilities of CN¥670.7m due within 12 months, and liabilities of CN¥3.11b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.65b as well as receivables valued at CN¥58.4m due within 12 months. So it has liabilities totalling CN¥2.08b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Tibet Mineral Development is worth CN¥10.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Tibet Mineral Development boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Tibet Mineral Development's load is not too heavy, because its EBIT was down 78% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tibet Mineral Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tibet Mineral Development has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Tibet Mineral Development recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although Tibet Mineral Development's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥329.6m. So although we see some areas for improvement, we're not too worried about Tibet Mineral Development's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Tibet Mineral Development has 3 warning signs (and 2 which are significant) we think you should know about.

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.