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.' 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 Pengxin International Mining Co.,Ltd (SHSE:600490) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Pengxin International MiningLtd Carry?

The image below, which you can click on for greater detail, shows that Pengxin International MiningLtd had debt of CN¥681.5m at the end of September 2024, a reduction from CN¥817.6m over a year. However, its balance sheet shows it holds CN¥990.5m in cash, so it actually has CN¥308.9m net cash.

A Look At Pengxin International MiningLtd's Liabilities

We can see from the most recent balance sheet that Pengxin International MiningLtd had liabilities of CN¥1.65b falling due within a year, and liabilities of CN¥140.5m due beyond that. On the other hand, it had cash of CN¥990.5m and CN¥178.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥616.3m.

Of course, Pengxin International MiningLtd has a market capitalization of CN¥8.41b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Pengxin International MiningLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Pengxin International MiningLtd'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.

Over 12 months, Pengxin International MiningLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.5b, which is a fall of 29%. That makes us nervous, to say the least.

So How Risky Is Pengxin International MiningLtd?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Pengxin International MiningLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥444m and booked a CN¥181m accounting loss. However, it has net cash of CN¥308.9m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Pengxin International MiningLtd 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.