Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries ”. When we think about the risk level of a business, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Xinjiang Xinxin Mining Industry Co., Ltd. (HKG: 3833) uses debt. But does this debt worry shareholders?
Why is debt risky?
Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest analysis on Xinjiang Xinxin mining industry
What is the debt of the Xinjiang Xinxin mining industry?
You can click on the graph below for historical figures, but it shows that Xinjiang Xinxin’s mining industry had debt of 1.70 billion yen in December 2020, down from 2.08 billion yen a year earlier. However, he has 406.1 million yen in cash, which translates into net debt of around 1.30 billion yen.
How strong is the track record of Xinjiang Xinxin mining industry?
Zooming in on the latest balance sheet data, we can see that Xinjiang Xinxin’s mining industry had liabilities of 1.90 billion yen owed within 12 months and liabilities of 935.9 million yen beyond. In return for these obligations, he had cash of 406.1 million yen as well as receivables valued at 203.7 million yen, due within 12 months. Thus, its liabilities outweigh the sum of its cash and its (short-term) receivables of 2.22 billion yen.
This deficit is sizable compared to its market capitalization of 2.58 billion yen, which suggests that shareholders should keep an eye on the use of debt by the Xinjiang Xinxin mining industry. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) cover his interests. costs (interest coverage). In this way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
The debt of Xinjiang Xinxin mining industry is 2.7 times its EBITDA, and its EBIT covers its interest costs 2.5 times as much. Taken together, this implies that while we wouldn’t like to see debt levels rise, we believe he can handle his current debt load. The bright side is that Xinjiang Xinxin’s mining industry increased its EBIT by 126% last year, which feeds like idealism among the youth. If this earnings trend continues, it will make its debt much more manageable in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of the Xinjiang Xinxin mining industry that will influence the balance sheet in the future. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debt with profits on paper; he needs cash. We therefore always check the part of this EBIT which translates into free cash flow. Fortunately for all shareholders, Xinjiang Xinxin’s mining industry has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
The conversion of EBIT to free cash flow by Xinjiang Xinxin mining industry was a real asset in this analysis, as was its EBIT growth rate. On the other hand, our confidence was undermined by his apparent struggle to cover his interest costs with his EBIT. If we consider all the elements mentioned above, it seems to us that the mining industry of Xinjiang Xinxin is managing its debt quite well. But a caveat: We believe debt levels are high enough to warrant continued monitoring. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that the Xinjiang Xinxin mining industry shows 1 warning sign in our investment analysis , you should know …
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
If you want to trade a wide range of investments, open an account with the cheapest * professional approved platform, Interactive Brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in the mentioned stocks.
*Interactive Brokers ranked Least Expensive Broker by StockBrokers.com Annual Online Review 2020
Do you have any comments on this article? Concerned about the content? Get in touch with us directly. Otherwise, email the editorial team (at) simplywallst.com