Sinomine Resource Group (SZSE:002738) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Sinomine Resource Group Co., Ltd. (SZSE:002738) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sinomine Resource Group

What Is Sinomine Resource Group's Debt?

As you can see below, Sinomine Resource Group had CN¥1.82b of debt at September 2023, down from CN¥2.03b a year prior. But on the other hand it also has CN¥5.82b in cash, leading to a CN¥3.99b net cash position.

A Look At Sinomine Resource Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Sinomine Resource Group had liabilities of CN¥2.73b due within 12 months and liabilities of CN¥1.11b due beyond that. Offsetting these obligations, it had cash of CN¥5.82b as well as receivables valued at CN¥740.4m due within 12 months. So it actually has CN¥2.72b 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 addition to that, we're happy to report that Sinomine Resource Group has boosted its EBIT by 49%, 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 Sinomine Resource Group'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 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 48% 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 Sinomine Resource Group has CN¥3.99b in net cash and a decent-looking balance sheet. And we liked the look of last year's 49% year-on-year EBIT growth. So is Sinomine Resource Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Sinomine Resource Group has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.