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.' 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 Jinduicheng Molybdenum Co., Ltd. (SHSE:601958) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jinduicheng Molybdenum's Debt?

As you can see below, at the end of September 2024, Jinduicheng Molybdenum had CN¥36.5m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥4.05b in cash to offset that, meaning it has CN¥4.02b net cash.

How Strong Is Jinduicheng Molybdenum's Balance Sheet?

The latest balance sheet data shows that Jinduicheng Molybdenum had liabilities of CN¥1.96b due within a year, and liabilities of CN¥622.4m falling due after that. Offsetting this, it had CN¥4.05b in cash and CN¥2.77b in receivables that were due within 12 months. So it actually has CN¥4.24b more liquid assets than total liabilities.

This short term liquidity is a sign that Jinduicheng Molybdenum could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jinduicheng Molybdenum boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Jinduicheng Molybdenum has increased its EBIT by 4.5% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jinduicheng Molybdenum can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jinduicheng Molybdenum 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. Over the last three years, Jinduicheng Molybdenum recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jinduicheng Molybdenum has net cash of CN¥4.02b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥3.5b. So we don't think Jinduicheng Molybdenum's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Jinduicheng Molybdenum , and understanding them should be part of your investment process.

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.