Does China Rare Earth Resources And Technology (SZSE:000831) Have A 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.' 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 China Rare Earth Resources And Technology Co., Ltd. (SZSE:000831) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Rare Earth Resources And Technology

What Is China Rare Earth Resources And Technology's Debt?

The image below, which you can click on for greater detail, shows that China Rare Earth Resources And Technology had debt of CN¥100.1m at the end of March 2024, a reduction from CN¥219.2m over a year. However, it does have CN¥1.36b in cash offsetting this, leading to net cash of CN¥1.26b.

How Strong Is China Rare Earth Resources And Technology's Balance Sheet?

According to the last reported balance sheet, China Rare Earth Resources And Technology had liabilities of CN¥326.9m due within 12 months, and liabilities of CN¥72.7m due beyond 12 months. Offsetting this, it had CN¥1.36b in cash and CN¥827.0m in receivables that were due within 12 months. So it actually has CN¥1.79b more liquid assets than total liabilities.

This surplus suggests that China Rare Earth Resources And Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Rare Earth Resources And Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact China Rare Earth Resources And Technology's saving grace is its low debt levels, because its EBIT has tanked 76% 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine China Rare Earth Resources And Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Rare Earth Resources And Technology 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. In the last three years, China Rare Earth Resources And Technology's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Rare Earth Resources And Technology has net cash of CN¥1.26b, as well as more liquid assets than liabilities. So we are not troubled with China Rare Earth Resources And Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for China Rare Earth Resources And Technology that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.