Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Chifeng Jilong Gold Mining Co.,Ltd. (SHSE:600988) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

What Is Chifeng Jilong Gold MiningLtd's Debt?

As you can see below, at the end of June 2024, Chifeng Jilong Gold MiningLtd had CN¥2.36b of debt, up from CN¥2.26b a year ago. Click the image for more detail. But on the other hand it also has CN¥2.63b in cash, leading to a CN¥276.5m net cash position.

How Healthy Is Chifeng Jilong Gold MiningLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chifeng Jilong Gold MiningLtd had liabilities of CN¥4.35b due within 12 months and liabilities of CN¥5.76b due beyond that. On the other hand, it had cash of CN¥2.63b and CN¥664.2m worth of receivables due within a year. So its liabilities total CN¥6.81b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Chifeng Jilong Gold MiningLtd is worth CN¥28.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Chifeng Jilong Gold MiningLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Chifeng Jilong Gold MiningLtd has boosted its EBIT by 94%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Chifeng Jilong Gold MiningLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chifeng Jilong Gold MiningLtd 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, Chifeng Jilong Gold MiningLtd reported free cash flow worth 3.3% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

Although Chifeng Jilong Gold MiningLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥276.5m. And we liked the look of last year's 94% year-on-year EBIT growth. So we don't have any problem with Chifeng Jilong Gold MiningLtd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Chifeng Jilong Gold MiningLtd's earnings per share history for free.

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.