Is Sichuan Mingxing Electric Power (SHSE:600101) A Risky Investment?

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, Sichuan Mingxing Electric Power Co., Ltd. (SHSE:600101) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sichuan Mingxing Electric Power

How Much Debt Does Sichuan Mingxing Electric Power Carry?

As you can see below, at the end of June 2024, Sichuan Mingxing Electric Power had CN¥80.0m of debt, up from CN¥50.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥895.1m in cash, so it actually has CN¥815.1m net cash.

How Strong Is Sichuan Mingxing Electric Power's Balance Sheet?

According to the last reported balance sheet, Sichuan Mingxing Electric Power had liabilities of CN¥904.0m due within 12 months, and liabilities of CN¥301.0m due beyond 12 months. Offsetting this, it had CN¥895.1m in cash and CN¥164.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥145.0m more than its cash and near-term receivables, combined.

Of course, Sichuan Mingxing Electric Power has a market capitalization of CN¥5.08b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sichuan Mingxing Electric Power also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Sichuan Mingxing Electric Power if management cannot prevent a repeat of the 23% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sichuan Mingxing Electric Power will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sichuan Mingxing Electric Power 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. Considering the last three years, Sichuan Mingxing Electric Power actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sichuan Mingxing Electric Power has CN¥815.1m in net cash. So we don't have any problem with Sichuan Mingxing Electric Power'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. Case in point: We've spotted 1 warning sign for Sichuan Mingxing Electric Power you should be aware of.

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.