We Think Sichuan Mingxing Electric Power (SHSE:600101) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Sichuan Mingxing Electric Power Co., Ltd. (SHSE:600101) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sichuan Mingxing Electric Power

How Much Debt Does Sichuan Mingxing Electric Power Carry?

The chart below, which you can click on for greater detail, shows that Sichuan Mingxing Electric Power had CN¥81.8m in debt in September 2024; about the same as the year before. However, it does have CN¥1.05b in cash offsetting this, leading to net cash of CN¥963.9m.

A Look At Sichuan Mingxing Electric Power's Liabilities

According to the last reported balance sheet, Sichuan Mingxing Electric Power had liabilities of CN¥902.0m due within 12 months, and liabilities of CN¥300.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.05b as well as receivables valued at CN¥172.7m 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 it's very unlikely that the CN¥5.43b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Sichuan Mingxing Electric Power has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Sichuan Mingxing Electric Power has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sichuan Mingxing Electric Power can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Sichuan Mingxing Electric Power reported free cash flow worth 7.4% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sichuan Mingxing Electric Power has net cash of CN¥963.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 33% year-on-year EBIT growth. So we don't think Sichuan Mingxing Electric Power's use of debt is risky. 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. 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.