David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Shanjin International Gold Co., Ltd. (SZSE:000975) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shanjin International Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shanjin International Gold had CN¥1.16b of debt, an increase on CN¥619.2m, over one year. But it also has CN¥4.04b in cash to offset that, meaning it has CN¥2.88b net cash.

A Look At Shanjin International Gold's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanjin International Gold had liabilities of CN¥2.31b due within 12 months and liabilities of CN¥1.53b due beyond that. Offsetting this, it had CN¥4.04b in cash and CN¥152.7m in receivables that were due within 12 months. So it actually has CN¥353.5m more liquid assets than total liabilities.

This state of affairs indicates that Shanjin International Gold's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥46.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Shanjin International Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shanjin International Gold grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. 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 Shanjin International Gold'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanjin International Gold 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. Over the last three years, Shanjin International Gold recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanjin International Gold has net cash of CN¥2.88b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.6b, being 88% of its EBIT. So we don't think Shanjin International Gold's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shanjin International Gold .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.