Warren Buffett famously said, '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 Inner Mongolia Xingye Silver &Tin Mining Co.,Ltd (SZSE:000426) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Inner Mongolia Xingye Silver &Tin MiningLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Inner Mongolia Xingye Silver &Tin MiningLtd had CN¥1.80b of debt, an increase on CN¥1.64b, over one year. However, because it has a cash reserve of CN¥792.9m, its net debt is less, at about CN¥1.00b.

A Look At Inner Mongolia Xingye Silver &Tin MiningLtd's Liabilities

The latest balance sheet data shows that Inner Mongolia Xingye Silver &Tin MiningLtd had liabilities of CN¥2.77b due within a year, and liabilities of CN¥1.21b falling due after that. Offsetting these obligations, it had cash of CN¥792.9m as well as receivables valued at CN¥194.4m due within 12 months. So its liabilities total CN¥2.99b more than the combination of its cash and short-term receivables.

Given Inner Mongolia Xingye Silver &Tin MiningLtd has a market capitalization of CN¥24.5b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Inner Mongolia Xingye Silver &Tin MiningLtd has a low net debt to EBITDA ratio of only 0.37. And its EBIT covers its interest expense a whopping 17.8 times over. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Inner Mongolia Xingye Silver &Tin MiningLtd grew its EBIT by 360% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Inner Mongolia Xingye Silver &Tin 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Inner Mongolia Xingye Silver &Tin MiningLtd recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Inner Mongolia Xingye Silver &Tin MiningLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its EBIT growth rate also supports that impression! Overall, we don't think Inner Mongolia Xingye Silver &Tin MiningLtd is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, to us. 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. For example - Inner Mongolia Xingye Silver &Tin MiningLtd has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.