Shanjin International Gold (SZSE:000975) Has A Rock Solid Balance Sheet

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.' 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. Importantly, Shanjin International Gold Co., Ltd. (SZSE:000975) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Shanjin International Gold Carry?

As you can see below, at the end of September 2024, Shanjin International Gold had CN¥1.16b of debt, up from CN¥619.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥4.04b in cash, leading to a CN¥2.88b net cash position.

How Healthy Is Shanjin International Gold's Balance Sheet?

The latest balance sheet data shows that Shanjin International Gold had liabilities of CN¥2.31b due within a year, and liabilities of CN¥1.53b falling due after that. On the other hand, it had cash of CN¥4.04b and CN¥152.7m worth of receivables due within a year. So it actually has CN¥353.5m more liquid assets than total liabilities.

Having regard to Shanjin International Gold's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥48.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shanjin International Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shanjin International Gold grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanjin International Gold 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanjin International Gold 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. During the last three years, Shanjin International Gold generated free cash flow amounting to a very robust 88% 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¥2.88b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥2.6b. So we don't think Shanjin International Gold's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Shanjin International Gold .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.