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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Inner Mongolia Yitai Coal Co.,Ltd. (SHSE:900948) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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 Inner Mongolia Yitai CoalLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Inner Mongolia Yitai CoalLtd had debt of CN¥14.5b at the end of September 2024, a reduction from CN¥16.4b over a year. However, its balance sheet shows it holds CN¥15.0b in cash, so it actually has CN¥444.0m net cash.

A Look At Inner Mongolia Yitai CoalLtd's Liabilities

According to the last reported balance sheet, Inner Mongolia Yitai CoalLtd had liabilities of CN¥14.6b due within 12 months, and liabilities of CN¥13.6b due beyond 12 months. Offsetting these obligations, it had cash of CN¥15.0b as well as receivables valued at CN¥1.49b due within 12 months. So it has liabilities totalling CN¥11.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Inner Mongolia Yitai CoalLtd is worth CN¥46.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Inner Mongolia Yitai CoalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Inner Mongolia Yitai CoalLtd if management cannot prevent a repeat of the 30% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Inner Mongolia Yitai CoalLtd will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Inner Mongolia Yitai CoalLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Inner Mongolia Yitai CoalLtd generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Inner Mongolia Yitai CoalLtd does have more liabilities than liquid assets, it also has net cash of CN¥444.0m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in CN¥10.0b. So we are not troubled with Inner Mongolia Yitai CoalLtd's debt use. 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. For example, we've discovered 1 warning sign for Inner Mongolia Yitai CoalLtd that you should be aware of before investing here.

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.