Here's Why China Kingstone Mining Holdings (HKG:1380) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies China Kingstone Mining Holdings Limited (HKG:1380) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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. 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.

Check out our latest analysis for China Kingstone Mining Holdings

What Is China Kingstone Mining Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 China Kingstone Mining Holdings had CN¥17.8m of debt, an increase on CN¥8.37m, over one year. However, it does have CN¥2.87m in cash offsetting this, leading to net debt of about CN¥14.9m.

A Look At China Kingstone Mining Holdings' Liabilities

According to the last reported balance sheet, China Kingstone Mining Holdings had liabilities of CN¥53.6m due within 12 months, and liabilities of CN¥2.74m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.87m as well as receivables valued at CN¥49.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.61m.

Since publicly traded China Kingstone Mining Holdings shares are worth a total of CN¥43.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Kingstone Mining Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, China Kingstone Mining Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥65m, which is a fall of 5.9%. We would much prefer see growth.

Caveat Emptor

Importantly, China Kingstone Mining Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥23m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥14m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 3 warning signs for China Kingstone Mining Holdings 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.