David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Shanxi Taigang Stainless Steel Co., Ltd. (SZSE:000825) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Shanxi Taigang Stainless Steel's Debt?
The image below, which you can click on for greater detail, shows that Shanxi Taigang Stainless Steel had debt of CN¥9.94b at the end of March 2024, a reduction from CN¥13.8b over a year. However, it does have CN¥7.00b in cash offsetting this, leading to net debt of about CN¥2.93b.
How Healthy Is Shanxi Taigang Stainless Steel's Balance Sheet?
We can see from the most recent balance sheet that Shanxi Taigang Stainless Steel had liabilities of CN¥22.4b falling due within a year, and liabilities of CN¥9.63b due beyond that. Offsetting this, it had CN¥7.00b in cash and CN¥2.36b in receivables that were due within 12 months. So it has liabilities totalling CN¥22.7b more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's CN¥21.3b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Shanxi Taigang Stainless Steel'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.
In the last year Shanxi Taigang Stainless Steel wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to CN¥104b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Shanxi Taigang Stainless Steel produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥1.3b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥485m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Shanxi Taigang Stainless Steel .
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.