Jiangxi Copper (HKG:358) seems to be using debt quite wisely

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Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Jiangxi Copper Company Limited (HKG:358) has a debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Jiangxi Copper

What is Jiangxi Copper’s net debt?

You can click on the graph below for historical figures, but it shows that in March 2022, Jiangxi Copper had a debt of 68.3 billion Canadian yen, an increase from 55.7 billion Canadian yen, over a year. However, he has 49.1 billion Canadian yen in cash to offset this, resulting in a net debt of approximately 19.2 billion Canadian yen.

SEHK: 358 Historical Debt to Equity June 19, 2022

How strong is Jiangxi Copper’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Jiangxi Copper had liabilities of 80.1 billion Canadian yen due within 12 months and liabilities of 21.2 billion domestic yen due beyond. On the other hand, it had a cash position of 49.1 billion Canadian yen and 15.0 billion national yen of receivables due within the year. It therefore has liabilities totaling 37.2 billion Canadian yen more than its cash and short-term receivables, combined.

This deficit is considerable compared to its market capitalization of 52.4 billion Canadian yen, so it suggests that shareholders monitor Jiangxi Copper’s use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Jiangxi Copper’s net debt is only 1.3 times its EBITDA. And its EBIT easily covers its interest costs, being 11.0 times greater. So we’re pretty relaxed about his super conservative use of debt. On top of that, Jiangxi Copper has increased its EBIT by 36% over the past twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Jiangxi Copper’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Jiangxi Copper has recorded free cash flow of 25% of its EBIT, which is lower than expected. That’s not great when it comes to paying off debt.

Our point of view

Jiangxi Copper’s ability to increase its EBIT and its interest coverage gave us comfort in its ability to manage its debt. That said, its level of total liabilities makes us somewhat aware of potential future risks to the balance sheet. Given this range of data points, we believe that Jiangxi Copper is in a good position to manage its level of leverage. But be warned: we believe debt levels are high enough to warrant continued monitoring. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 2 warning signs for Jiangxi Copper which you should be aware of before investing here.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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