Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, China Nonferrous Mining Corporation Limited (HKG:1258) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is China Nonferrous Mining's Net Debt?
As you can see below, China Nonferrous Mining had US$30.2m of debt at December 2024, down from US$177.5m a year prior. However, it does have US$1.02b in cash offsetting this, leading to net cash of US$992.7m.
How Healthy Is China Nonferrous Mining's Balance Sheet?
We can see from the most recent balance sheet that China Nonferrous Mining had liabilities of US$860.9m falling due within a year, and liabilities of US$264.4m due beyond that. Offsetting this, it had US$1.02b in cash and US$256.7m in receivables that were due within 12 months. So it actually has US$154.2m more liquid assets than total liabilities.
This surplus suggests that China Nonferrous Mining has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Nonferrous Mining boasts net cash, so it's fair to say it does not have a heavy debt load!
View our latest analysis for China Nonferrous Mining
Also positive, China Nonferrous Mining grew its EBIT by 25% 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 future earnings, more than anything, that will determine China Nonferrous Mining's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Nonferrous 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 three years, China Nonferrous Mining generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that China Nonferrous Mining has net cash of US$992.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in US$606m. So is China Nonferrous Mining's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for China Nonferrous Mining that you should be aware of.
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.
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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.