Is Jinchuan Group International Resources (HKG:2362) Using Debt Sensibly?

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 Jinchuan Group International Resources Co. Ltd (HKG:2362) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jinchuan Group International Resources

What Is Jinchuan Group International Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Jinchuan Group International Resources had US$418.7m of debt, an increase on US$333.6m, over one year. On the flip side, it has US$131.8m in cash leading to net debt of about US$286.9m.

How Healthy Is Jinchuan Group International Resources' Balance Sheet?

We can see from the most recent balance sheet that Jinchuan Group International Resources had liabilities of US$324.7m falling due within a year, and liabilities of US$697.4m due beyond that. Offsetting this, it had US$131.8m in cash and US$98.0m in receivables that were due within 12 months. So it has liabilities totalling US$792.3m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$687.2m, we think shareholders really should watch Jinchuan Group International Resources's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jinchuan Group International Resources's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Jinchuan Group International Resources had a loss before interest and tax, and actually shrunk its revenue by 34%, to US$669m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jinchuan Group International Resources's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$67m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$47m in negative free cash flow over the last year. That means it's on the risky side of things. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jinchuan Group International Resources's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.