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.' 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. Importantly, Guangxi Huaxi Nonferrous Metal Co.,Ltd (SHSE:600301) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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 Guangxi Huaxi Nonferrous MetalLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Guangxi Huaxi Nonferrous MetalLtd had CN¥1.31b of debt in March 2024, down from CN¥1.46b, one year before. However, because it has a cash reserve of CN¥837.8m, its net debt is less, at about CN¥477.0m.

How Healthy Is Guangxi Huaxi Nonferrous MetalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangxi Huaxi Nonferrous MetalLtd had liabilities of CN¥1.75b due within 12 months and liabilities of CN¥570.1m due beyond that. Offsetting this, it had CN¥837.8m in cash and CN¥212.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.27b more than its cash and near-term receivables, combined.

Given Guangxi Huaxi Nonferrous MetalLtd has a market capitalization of CN¥11.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Guangxi Huaxi Nonferrous MetalLtd's net debt is only 0.46 times its EBITDA. And its EBIT easily covers its interest expense, being 13.8 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Guangxi Huaxi Nonferrous MetalLtd grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Guangxi Huaxi Nonferrous MetalLtd'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 last three years, Guangxi Huaxi Nonferrous MetalLtd recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Guangxi Huaxi Nonferrous MetalLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It looks Guangxi Huaxi Nonferrous MetalLtd has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. Over time, share prices tend to follow earnings per share, so if you're interested in Guangxi Huaxi Nonferrous MetalLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.