Tibet Mineral Development (SZSE:000762) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Tibet Mineral Development Co., LTD (SZSE:000762) makes use of debt. But the real question is whether this debt is making the company risky.

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 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.

How Much Debt Does Tibet Mineral Development Carry?

As you can see below, Tibet Mineral Development had CN¥1.29b 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¥1.43b in cash offsetting this, leading to net cash of CN¥140.3m.

How Strong Is Tibet Mineral Development's Balance Sheet?

We can see from the most recent balance sheet that Tibet Mineral Development had liabilities of CN¥269.1m falling due within a year, and liabilities of CN¥3.05b due beyond that. Offsetting these obligations, it had cash of CN¥1.43b as well as receivables valued at CN¥30.3m due within 12 months. So it has liabilities totalling CN¥1.86b more than its cash and near-term receivables, combined.

Since publicly traded Tibet Mineral Development shares are worth a total of CN¥11.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Tibet Mineral Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Tibet Mineral Development

In fact Tibet Mineral Development's saving grace is its low debt levels, because its EBIT has tanked 81% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Tibet Mineral Development can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tibet Mineral Development may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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

While Tibet Mineral Development does have more liabilities than liquid assets, it also has net cash of CN¥140.3m. So while Tibet Mineral Development does not have a great balance sheet, it's certainly not too bad. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Tibet Mineral Development's earnings per share history for free.

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.