Is Mount Everest Gold Group (HKG:1815) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Mount Everest Gold Group Company Limited (HKG:1815) does have debt on its balance sheet. But is this debt a concern to shareholders?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

When Is Debt A Problem?

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.

What Is Mount Everest Gold Group's Net Debt?

As you can see below, Mount Everest Gold Group had CN¥106.2m of debt at December 2024, down from CN¥127.7m a year prior. But on the other hand it also has CN¥429.3m in cash, leading to a CN¥323.1m net cash position.

How Healthy Is Mount Everest Gold Group's Balance Sheet?

The latest balance sheet data shows that Mount Everest Gold Group had liabilities of CN¥291.0m due within a year, and liabilities of CN¥204.0k falling due after that. Offsetting these obligations, it had cash of CN¥429.3m as well as receivables valued at CN¥119.3m due within 12 months. So it actually has CN¥257.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Mount Everest Gold Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mount Everest Gold Group has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Mount Everest Gold Group

We also note that Mount Everest Gold Group improved its EBIT from a last year's loss to a positive CN¥7.0m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mount Everest Gold Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mount Everest Gold Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Mount Everest Gold Group actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mount Everest Gold Group has net cash of CN¥323.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥24m, being 341% of its EBIT. So we don't have any problem with Mount Everest Gold Group's use of debt. 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. Be aware that Mount Everest Gold Group is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.