Here's Why Sinomine Resource Group (SZSE:002738) Can Manage Its Debt Responsibly

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.' 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 Sinomine Resource Group Co., Ltd. (SZSE:002738) makes use of debt. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sinomine Resource Group

What Is Sinomine Resource Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sinomine Resource Group had CN¥1.11b of debt in June 2024, down from CN¥2.17b, one year before. But it also has CN¥3.90b in cash to offset that, meaning it has CN¥2.79b net cash.

How Strong Is Sinomine Resource Group's Balance Sheet?

We can see from the most recent balance sheet that Sinomine Resource Group had liabilities of CN¥2.19b falling due within a year, and liabilities of CN¥1.28b due beyond that. Offsetting this, it had CN¥3.90b in cash and CN¥531.6m in receivables that were due within 12 months. So it actually has CN¥954.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Sinomine Resource Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sinomine Resource Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Sinomine Resource Group's saving grace is its low debt levels, because its EBIT has tanked 65% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Sinomine Resource Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sinomine Resource Group 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, Sinomine Resource Group's free cash flow amounted to 29% of its EBIT, less 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 Sinomine Resource Group has CN¥2.79b in net cash and a decent-looking balance sheet. So we don't have any problem with Sinomine Resource Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sinomine Resource Group (of which 1 doesn't sit too well with us!) you should know about.

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.