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, Shanxi Coking Coal Energy Group Co., Ltd. (SZSE:000983) does carry debt. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Shanxi Coking Coal Energy Group Carry?

As you can see below, Shanxi Coking Coal Energy Group had CN¥8.93b of debt at March 2024, down from CN¥10.2b a year prior. However, its balance sheet shows it holds CN¥18.0b in cash, so it actually has CN¥9.06b net cash.

How Strong Is Shanxi Coking Coal Energy Group's Balance Sheet?

We can see from the most recent balance sheet that Shanxi Coking Coal Energy Group had liabilities of CN¥23.0b falling due within a year, and liabilities of CN¥20.1b due beyond that. Offsetting these obligations, it had cash of CN¥18.0b as well as receivables valued at CN¥5.26b due within 12 months. So its liabilities total CN¥19.8b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Shanxi Coking Coal Energy Group has a market capitalization of CN¥43.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Shanxi Coking Coal Energy Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Shanxi Coking Coal Energy Group if management cannot prevent a repeat of the 49% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanxi Coking Coal Energy Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanxi Coking Coal Energy Group 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, Shanxi Coking Coal Energy Group generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Shanxi Coking Coal Energy Group does have more liabilities than liquid assets, it also has net cash of CN¥9.06b. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in CN¥5.5b. So we are not troubled with Shanxi Coking Coal Energy Group's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Shanxi Coking Coal Energy Group .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.