Aluminum Corporation of China (HKG:2600) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Aluminum Corporation of China Limited (HKG:2600) makes use of debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Aluminum Corporation of China's Debt?

As you can see below, Aluminum Corporation of China had CN¥57.4b of debt at March 2025, down from CN¥64.2b a year prior. However, it does have CN¥27.1b in cash offsetting this, leading to net debt of about CN¥30.3b.

How Healthy Is Aluminum Corporation of China's Balance Sheet?

The latest balance sheet data shows that Aluminum Corporation of China had liabilities of CN¥50.0b due within a year, and liabilities of CN¥58.4b falling due after that. Offsetting these obligations, it had cash of CN¥27.1b as well as receivables valued at CN¥12.7b due within 12 months. So it has liabilities totalling CN¥68.6b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of CN¥105.2b, so it does suggest shareholders should keep an eye on Aluminum Corporation of China's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

Check out our latest analysis for Aluminum Corporation of China

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Aluminum Corporation of China's net debt is only 0.80 times its EBITDA. And its EBIT easily covers its interest expense, being 29.0 times the size. So we're pretty relaxed about its super-conservative use of debt. On top of that, Aluminum Corporation of China grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. 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 Aluminum Corporation of China can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Aluminum Corporation of China generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Aluminum Corporation of China's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. Zooming out, Aluminum Corporation of China seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. Given Aluminum Corporation of China has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.