We Think Xinjiang Xinxin Mining Industry (HKG:3833) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Xinjiang Xinxin Mining Industry Co., Ltd. (HKG:3833) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Xinjiang Xinxin Mining Industry

What Is Xinjiang Xinxin Mining Industry's Debt?

You can click the graphic below for the historical numbers, but it shows that Xinjiang Xinxin Mining Industry had CN¥1.70b of debt in December 2020, down from CN¥2.08b, one year before. However, it does have CN¥406.1m in cash offsetting this, leading to net debt of about CN¥1.30b.

How Strong Is Xinjiang Xinxin Mining Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xinjiang Xinxin Mining Industry had liabilities of CN¥1.90b due within 12 months and liabilities of CN¥935.9m due beyond that. Offsetting these obligations, it had cash of CN¥406.1m as well as receivables valued at CN¥203.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.22b.

This deficit is considerable relative to its market capitalization of CN¥2.58b, so it does suggest shareholders should keep an eye on Xinjiang Xinxin Mining Industry's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Xinjiang Xinxin Mining Industry's debt is 2.7 times its EBITDA, and its EBIT cover its interest expense 2.5 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. The silver lining is that Xinjiang Xinxin Mining Industry grew its EBIT by 126% last year, which nourishing like the idealism of youth. If that earnings trend continues it will make its debt load much more manageable in the future. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xinjiang Xinxin Mining Industry'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Xinjiang Xinxin Mining Industry actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Xinjiang Xinxin Mining Industry's conversion of EBIT to free cash flow was a real positive on this analysis, as was its EBIT growth rate. In contrast, our confidence was undermined by its apparent struggle to cover its interest expense with its EBIT. When we consider all the elements mentioned above, it seems to us that Xinjiang Xinxin Mining Industry is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. Be aware that Xinjiang Xinxin Mining Industry is showing 1 warning sign in our investment analysis , 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. 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.
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