Does China Daye Non-Ferrous Metals Mining (HKG:661) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies China Daye Non-Ferrous Metals Mining Limited (HKG:661) makes use of debt. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is China Daye Non-Ferrous Metals Mining's Debt?

As you can see below, at the end of June 2025, China Daye Non-Ferrous Metals Mining had CN¥17.2b of debt, up from CN¥16.3b a year ago. Click the image for more detail. However, it does have CN¥1.88b in cash offsetting this, leading to net debt of about CN¥15.3b.

A Look At China Daye Non-Ferrous Metals Mining's Liabilities

According to the last reported balance sheet, China Daye Non-Ferrous Metals Mining had liabilities of CN¥13.7b due within 12 months, and liabilities of CN¥10.4b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.88b as well as receivables valued at CN¥61.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥22.1b.

This deficit casts a shadow over the CN¥1.64b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, China Daye Non-Ferrous Metals Mining would likely require a major re-capitalisation if it had to pay its creditors today.

See our latest analysis for China Daye Non-Ferrous Metals Mining

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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).

China Daye Non-Ferrous Metals Mining shareholders face the double whammy of a high net debt to EBITDA ratio (12.8), and fairly weak interest coverage, since EBIT is just 0.67 times the interest expense. This means we'd consider it to have a heavy debt load. Even worse, China Daye Non-Ferrous Metals Mining saw its EBIT tank 63% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. 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 Daye Non-Ferrous Metals Mining 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, China Daye Non-Ferrous Metals Mining burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both China Daye Non-Ferrous Metals Mining's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And furthermore, its interest cover also fails to instill confidence. Considering everything we've mentioned above, it's fair to say that China Daye Non-Ferrous Metals Mining is carrying heavy debt load. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for China Daye Non-Ferrous Metals Mining that you should be aware of before investing here.

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.