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.' 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. As with many other companies Sinomine Resource Group Co., Ltd. (SZSE:002738) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sinomine Resource Group

What Is Sinomine Resource Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Sinomine Resource Group had CN¥2.19b of debt, an increase on CN¥914.2m, over one year. However, it does have CN¥2.31b in cash offsetting this, leading to net cash of CN¥118.5m.

How Strong Is Sinomine Resource Group's Balance Sheet?

The latest balance sheet data shows that Sinomine Resource Group had liabilities of CN¥1.88b due within a year, and liabilities of CN¥1.77b falling due after that. Offsetting these obligations, it had cash of CN¥2.31b as well as receivables valued at CN¥754.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥589.8m.

This state of affairs indicates that Sinomine Resource Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥41.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Sinomine Resource Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Sinomine Resource Group grew its EBIT by 509% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sinomine Resource Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sinomine Resource Group 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. Looking at the most recent three years, Sinomine Resource Group recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Sinomine Resource Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥118.5m. And it impressed us with its EBIT growth of 509% over the last year. So is Sinomine Resource Group's debt a risk? It doesn't seem so to us. 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. For example - Sinomine Resource Group 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.