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. We note that Mongolian Mining Corporation (HKG:975) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Mongolian Mining
How Much Debt Does Mongolian Mining Carry?
You can click the graphic below for the historical numbers, but it shows that Mongolian Mining had US$214.9m of debt in June 2024, down from US$341.6m, one year before. However, its balance sheet shows it holds US$278.6m in cash, so it actually has US$63.7m net cash.
How Healthy Is Mongolian Mining's Balance Sheet?
We can see from the most recent balance sheet that Mongolian Mining had liabilities of US$422.9m falling due within a year, and liabilities of US$408.4m due beyond that. Offsetting this, it had US$278.6m in cash and US$117.5m in receivables that were due within 12 months. So it has liabilities totalling US$435.2m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Mongolian Mining is worth US$1.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Mongolian Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also positive, Mongolian Mining grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mongolian Mining's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mongolian 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. During the last two years, Mongolian Mining produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While Mongolian Mining does have more liabilities than liquid assets, it also has net cash of US$63.7m. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in US$200m. So we don't think Mongolian Mining's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Mongolian Mining's earnings per share history for free.
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.