Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Huaibei Mining Holdings Co.,Ltd. (SHSE:600985) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Huaibei Mining HoldingsLtd Carry?

The image below, which you can click on for greater detail, shows that Huaibei Mining HoldingsLtd had debt of CN¥6.02b at the end of September 2024, a reduction from CN¥11.5b over a year. However, it does have CN¥7.20b in cash offsetting this, leading to net cash of CN¥1.19b.

How Strong Is Huaibei Mining HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, Huaibei Mining HoldingsLtd had liabilities of CN¥27.5b due within 12 months, and liabilities of CN¥15.5b due beyond 12 months. On the other hand, it had cash of CN¥7.20b and CN¥5.28b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥30.6b.

This is a mountain of leverage relative to its market capitalization of CN¥39.9b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Huaibei Mining HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Huaibei Mining HoldingsLtd if management cannot prevent a repeat of the 22% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Huaibei Mining HoldingsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Huaibei Mining HoldingsLtd 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, Huaibei Mining HoldingsLtd recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Huaibei Mining HoldingsLtd'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¥1.19b. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in CN¥3.8b. So we are not troubled with Huaibei Mining HoldingsLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Huaibei Mining HoldingsLtd you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.