Warren Buffett famously said, '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. We note that China Mining International Limited (SGX:BHD) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does China Mining International Carry?

You can click the graphic below for the historical numbers, but it shows that China Mining International had CN¥25.4m of debt in June 2024, down from CN¥42.1m, one year before. On the flip side, it has CN¥2.14m in cash leading to net debt of about CN¥23.3m.

debt-equity-history-analysis

A Look At China Mining International's Liabilities

According to the last reported balance sheet, China Mining International had liabilities of CN¥42.3m due within 12 months, and liabilities of CN¥41.8m due beyond 12 months. On the other hand, it had cash of CN¥2.14m and CN¥5.21m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥76.8m.

This is a mountain of leverage relative to its market capitalization of CN¥88.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Mining International's earnings that will influence how the balance sheet holds up in the future.

Over 12 months, China Mining International made a loss at the EBIT level, and saw its revenue drop to CN¥1.6m, which is a fall of 92%. That makes us nervous, to say the least.

Caveat Emptor

Not only did China Mining International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥22m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥7.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet.