Sinomine Resource Group (SZSE:002738) Has A Pretty Healthy Balance Sheet

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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Sinomine Resource Group

What Is Sinomine Resource Group's Debt?

The image below, which you can click on for greater detail, shows that Sinomine Resource Group had debt of CN¥884.7m at the end of September 2024, a reduction from CN¥1.49b over a year. However, its balance sheet shows it holds CN¥3.95b in cash, so it actually has CN¥3.07b net cash.

A Look At Sinomine Resource Group's Liabilities

According to the last reported balance sheet, Sinomine Resource Group had liabilities of CN¥2.63b due within 12 months, and liabilities of CN¥1.40b due beyond 12 months. On the other hand, it had cash of CN¥3.95b and CN¥774.0m worth of receivables due within a year. So it can boast CN¥701.1m more liquid assets than total liabilities.

This surplus suggests that Sinomine Resource Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 80% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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. While Sinomine Resource Group 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, Sinomine Resource Group recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sinomine Resource Group has net cash of CN¥3.07b, as well as more liquid assets than liabilities. So we are not troubled with Sinomine Resource Group'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 example Sinomine Resource Group has 3 warning signs (and 2 which are significant) we think you should know about.

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.