We Think Tibet Mineral Development (SZSE:000762) Is Taking Some Risk With Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Tibet Mineral Development Co., LTD (SZSE:000762) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Tibet Mineral Development

How Much Debt Does Tibet Mineral Development Carry?

The chart below, which you can click on for greater detail, shows that Tibet Mineral Development had CN¥1.29b in debt in September 2024; about the same as the year before. However, it does have CN¥1.43b in cash offsetting this, leading to net cash of CN¥140.3m.

How Healthy Is Tibet Mineral Development's Balance Sheet?

According to the last reported balance sheet, Tibet Mineral Development had liabilities of CN¥269.1m due within 12 months, and liabilities of CN¥3.05b due beyond 12 months. On the other hand, it had cash of CN¥1.43b and CN¥30.3m worth of receivables due within a year. 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¥12.9b, 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. Despite its noteworthy liabilities, Tibet Mineral Development boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Tibet Mineral Development's saving grace is its low debt levels, because its EBIT has tanked 81% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last three years, Tibet Mineral Development actually recorded a cash outflow, overall. 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¥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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.