Is Shanjin International Gold (SZSE:000975) 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.' 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. As with many other companies Shanjin International Gold Co., Ltd. (SZSE:000975) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shanjin International Gold

What Is Shanjin International Gold's Net Debt?

As you can see below, Shanjin International Gold had CN¥79.0m of debt at June 2024, down from CN¥644.4m a year prior. However, its balance sheet shows it holds CN¥4.28b in cash, so it actually has CN¥4.20b net cash.

How Strong Is Shanjin International Gold's Balance Sheet?

According to the last reported balance sheet, Shanjin International Gold had liabilities of CN¥2.13b due within 12 months, and liabilities of CN¥374.4m due beyond 12 months. On the other hand, it had cash of CN¥4.28b and CN¥108.6m worth of receivables due within a year. So it can boast CN¥1.89b more liquid assets than total liabilities.

This short term liquidity is a sign that Shanjin International Gold could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanjin International Gold has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shanjin International Gold has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanjin International Gold's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shanjin International Gold 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. During the last three years, Shanjin International Gold generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanjin International Gold has CN¥4.20b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.3b, being 91% of its EBIT. So we don't think Shanjin International Gold's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shanjin International Gold .

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.