Here's Why China Rare Earth Resources And Technology (SZSE:000831) Can Manage Its Debt Responsibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies China Rare Earth Resources And Technology Co., Ltd. (SZSE:000831) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

How Much Debt Does China Rare Earth Resources And Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 China Rare Earth Resources And Technology had CN¥102.1m of debt, an increase on CN¥57.7m, over one year. However, it does have CN¥1.25b in cash offsetting this, leading to net cash of CN¥1.15b.

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

We can see from the most recent balance sheet that China Rare Earth Resources And Technology had liabilities of CN¥400.1m falling due within a year, and liabilities of CN¥70.7m due beyond that. Offsetting this, it had CN¥1.25b in cash and CN¥818.7m in receivables that were due within 12 months. So it actually has CN¥1.60b 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 94% in the last twelve months. 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 China Rare Earth Resources And Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While China Rare Earth Resources And Technology 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. Looking at the most recent three years, China Rare Earth Resources And Technology recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Rare Earth Resources And Technology has CN¥1.15b in net cash and a decent-looking balance sheet. So we are not troubled with China Rare Earth Resources And Technology's debt use. While China Rare Earth Resources And Technology didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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.