The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Sinomine Resource Group Co., Ltd. (SZSE:002738) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Sinomine Resource Group's Net Debt?

As you can see below, Sinomine Resource Group had CN¥884.7m of debt at September 2024, down from CN¥1.49b a year prior. But it also has CN¥3.95b in cash to offset that, meaning it has CN¥3.07b net cash.

How Healthy Is Sinomine Resource Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sinomine Resource Group had liabilities of CN¥2.63b due within 12 months and liabilities of CN¥1.40b due beyond that. Offsetting these obligations, it had cash of CN¥3.95b as well as receivables valued at CN¥774.0m due within 12 months. So it can boast CN¥701.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Sinomine Resource Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sinomine Resource Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Sinomine Resource Group's load is not too heavy, because its EBIT was down 80% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sinomine Resource Group'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sinomine Resource Group 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. In the last three years, Sinomine Resource Group's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sinomine Resource Group has CN¥3.07b in net cash and a decent-looking balance sheet. So we are not troubled with Sinomine Resource 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 learn about the 3 warning signs we've spotted with Sinomine Resource Group (including 2 which are a bit concerning) .

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.