Is Sichuan Mingxing Electric Power (SHSE:600101) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sichuan Mingxing Electric Power Co., Ltd. (SHSE:600101) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sichuan Mingxing Electric Power

What Is Sichuan Mingxing Electric Power's Net Debt?

As you can see below, Sichuan Mingxing Electric Power had CN¥80.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥968.1m in cash, leading to a CN¥888.1m net cash position.

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

The latest balance sheet data shows that Sichuan Mingxing Electric Power had liabilities of CN¥844.0m due within a year, and liabilities of CN¥304.4m falling due after that. Offsetting these obligations, it had cash of CN¥968.1m as well as receivables valued at CN¥178.0m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Sichuan Mingxing Electric Power's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

But the other side of the story is that Sichuan Mingxing Electric Power saw its EBIT decline by 5.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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. Looking at the most recent three years, Sichuan Mingxing Electric Power recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥888.1m in net cash. So we are not troubled with Sichuan Mingxing Electric Power's debt use. 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. To that end, you should be aware of the 3 warning signs we've spotted with Sichuan Mingxing Electric Power .

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.