Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that China Nonferrous Mining Corporation Limited (HKG:1258) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Debt?

The image below, which you can click on for greater detail, shows that China Nonferrous Mining had debt of US$160.7m at the end of June 2024, a reduction from US$482.9m over a year. However, it does have US$1.04b in cash offsetting this, leading to net cash of US$877.1m.

How Healthy Is China Nonferrous Mining's Balance Sheet?

According to the last reported balance sheet, China Nonferrous Mining had liabilities of US$1.18b due within 12 months, and liabilities of US$219.9m due beyond 12 months. Offsetting these obligations, it had cash of US$1.04b as well as receivables valued at US$539.2m due within 12 months. So it can boast US$181.1m more liquid assets than total liabilities.

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

Another good sign is that China Nonferrous Mining has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. 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 China Nonferrous Mining 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While China Nonferrous Mining 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. During the last three years, China Nonferrous Mining produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Nonferrous Mining has US$877.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 29% over the last year. So is China Nonferrous Mining's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with China Nonferrous Mining , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.