Would China Kingstone Mining Holdings (HKG:1380) Be Better Off With Less 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. We note that China Kingstone Mining Holdings Limited (HKG:1380) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Kingstone Mining Holdings

How Much Debt Does China Kingstone Mining Holdings Carry?

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. On the flip side, it has CN¥2.87m in cash leading to net debt of about CN¥14.9m.

How Healthy Is China Kingstone Mining Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Kingstone Mining Holdings had liabilities of CN¥53.6m falling due within a year, and liabilities of CN¥2.74m due beyond that. On the other hand, it had cash of CN¥2.87m and CN¥49.8m worth of receivables due within a year. So its liabilities total CN¥3.61m more than the combination of its cash and short-term receivables.

Of course, China Kingstone Mining Holdings has a market capitalization of CN¥52.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. 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 5.9%, to CN¥65m. 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. 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. We would feel better if it turned its trailing twelve month loss of CN¥57m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for China Kingstone Mining Holdings (of which 2 are concerning!) you should know about.

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.