Chugai Mining (TSE:1491) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, Chugai Mining Co., Ltd. (TSE:1491) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Chugai Mining

What Is Chugai Mining's Net Debt?

The chart below, which you can click on for greater detail, shows that Chugai Mining had JP¥2.00b in debt in September 2024; about the same as the year before. But it also has JP¥3.43b in cash to offset that, meaning it has JP¥1.43b net cash.

A Look At Chugai Mining's Liabilities

The latest balance sheet data shows that Chugai Mining had liabilities of JP¥4.75b due within a year, and liabilities of JP¥942.0m falling due after that. Offsetting this, it had JP¥3.43b in cash and JP¥828.0m in receivables that were due within 12 months. So its liabilities total JP¥1.44b more than the combination of its cash and short-term receivables.

Given Chugai Mining has a market capitalization of JP¥11.5b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Chugai Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Chugai Mining has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chugai Mining 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 company can only pay off debt with cold hard cash, not accounting profits. Chugai Mining may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Chugai Mining recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While Chugai Mining does have more liabilities than liquid assets, it also has net cash of JP¥1.43b. And we liked the look of last year's 20% year-on-year EBIT growth. So we are not troubled with Chugai Mining's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Chugai Mining (of which 1 can't be ignored!) 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. 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.