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

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. Importantly, China Kingstone Mining Holdings Limited (HKG:1380) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 Debt?

As you can see below, China Kingstone Mining Holdings had CN¥17.9m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥2.39m in cash leading to net debt of about CN¥15.5m.

How Healthy Is China Kingstone Mining Holdings' Balance Sheet?

According to the last reported balance sheet, China Kingstone Mining Holdings had liabilities of CN¥90.6m due within 12 months, and liabilities of CN¥2.70m due beyond 12 months. On the other hand, it had cash of CN¥2.39m and CN¥62.6m worth of receivables due within a year. So it has liabilities totalling CN¥28.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥46.7m, so it does suggest shareholders should keep an eye on China Kingstone Mining Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Kingstone Mining Holdings 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.

In the last year China Kingstone Mining Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to CN¥62m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months China Kingstone Mining Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥46m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥11m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with China Kingstone Mining Holdings (including 4 which are concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.