The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Guizhou Wire Rope Incorporated Company (SHSE:600992) makes use of debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Guizhou Wire Rope
What Is Guizhou Wire Rope's Debt?
The image below, which you can click on for greater detail, shows that Guizhou Wire Rope had debt of CN¥656.2m at the end of June 2022, a reduction from CN¥813.5m over a year. However, because it has a cash reserve of CN¥444.9m, its net debt is less, at about CN¥211.3m.
SHSE:600992 Debt to Equity History September 9th 2022
How Strong Is Guizhou Wire Rope's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Guizhou Wire Rope had liabilities of CN¥1.48b due within 12 months and liabilities of CN¥339.6m due beyond that. On the other hand, it had cash of CN¥444.9m and CN¥468.6m worth of receivables due within a year. So it has liabilities totalling CN¥908.3m more than its cash and near-term receivables, combined.
Given Guizhou Wire Rope has a market capitalization of CN¥9.51b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Strangely Guizhou Wire Rope has a sky high EBITDA ratio of 6.3, implying high debt, but a strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Shareholders should be aware that Guizhou Wire Rope's EBIT was down 77% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guizhou Wire Rope will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Guizhou Wire Rope burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Our View
To be frank both Guizhou Wire Rope's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Overall, we think it's fair to say that Guizhou Wire Rope has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Guizhou Wire Rope (1 is significant) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
伯克希尔哈撒韦的外部基金经理理想汽车·卢直言不讳地说,最大的投资风险不是价格的波动,而是你是否会遭受永久性的资本损失。因此,当你考虑到任何一只股票的风险有多大时,你需要考虑债务可能是显而易见的,因为太多的债务可能会让一家公司倒闭。与许多其他公司一样贵州省钢丝绳股份有限公司(上海证券交易所:600992)利用债务。但股东是否应该担心它的债务使用情况?
为什么债务会带来风险?
债务是帮助企业发展的一种工具,但如果一家企业无法偿还贷款人的债务,那么它就只能听从贷款人的摆布。如果情况真的变得很糟糕,贷款人可以控制业务。尽管这并不常见,但我们确实经常看到负债累累的公司永久性地稀释股东的权益,因为贷款人迫使他们以令人沮丧的价格筹集资金。当然,债务的好处是,它往往代表着廉价资本,特别是当它用能够以高回报率进行再投资的能力取代公司的稀释时。在考虑一家公司的债务水平时,第一步是同时考虑其现金和债务。
查看我们对贵州钢丝绳的最新分析
贵州钢丝绳的债务是什么?
下图显示,截至2022年6月底,贵州钢丝绳的债务为6.562亿加元,低于一年来的8.135亿加元。你可以点击下面的图片查看更多细节。然而,由于它拥有4.449亿加元的现金储备,其净债务较少,约为2.113亿加元。
上证综指:600992债转股历史2022年9月9日
贵州钢丝绳的资产负债表有多强?
放大最新的资产负债表数据可以看到,贵州钢丝绳有14.8亿加元的负债在12个月内到期,还有3.396亿加元的负债在12个月内到期。另一方面,它有4.449亿加元的现金和4.686亿加元的应收账款在一年内到期。因此,它的负债总额比现金和近期应收账款加起来还要多9.083亿元。
鉴于贵州钢丝绳的市值为95.1亿元人民币,很难相信这些债务会构成太大威胁。但有足够的负债,我们肯定会建议股东继续监控未来的资产负债表。
为了评估一家公司的债务相对于它的收益,我们计算它的净债务除以它的利息、税项、折旧和摊销前收益(EBITDA)和它的利息和税前收益(EBIT)除以它的利息支出(它的利息覆盖)。这样,我们既考虑了债务的绝对量,也考虑了为其支付的利率。
奇怪的是,贵州钢丝绳的EBITDA比率达到了6.3的天价,这意味着债务很高,但利息覆盖率高达1k。因此,要么它可以获得非常便宜的长期债务,要么利息支出将会增长!股东们应该知道,贵州钢丝绳的息税前利润去年下降了77%。如果这种盈利趋势持续下去,那么偿还债务就像把猫赶上过山车一样容易。当你分析债务时,资产负债表显然是你关注的领域。但你不能完全孤立地看待债务,因为贵州钢丝绳需要盈利来偿还债务。因此,如果你热衷于了解更多关于它的收益,可能值得查看一下它的长期收益趋势图。
最后,尽管税务人员可能喜欢会计利润,但贷款人只接受冷硬现金。因此,我们总是检查EBIT中有多少转化为自由现金流。在过去的三年里,贵州钢丝绳烧掉了大量现金。尽管投资者无疑预计这种情况会在适当的时候逆转,但这显然意味着它使用债务的风险更大。
我们的观点
坦率地说,贵州钢绳将息税前利润转换为自由现金流,以及其息税前利润(不)增长的记录,都让我们对其债务水平感到相当不安。但从好的方面来看,它的利息覆盖是一个好兆头,让我们更加乐观。总体而言,我们认为,可以公平地说,贵州钢丝绳的债务足够多,资产负债表周围存在一些真正的风险。如果一切顺利,这可能会得到回报,但这笔债务的不利之处是永久性损失的风险更大。在分析债务水平时,资产负债表显然是一个起点。然而,并非所有投资风险都存在于资产负债表中--远非如此。例如,我们已经确定贵州钢丝绳的3个警示标志(1是重要的)您应该知道。
如果你对一家增长迅速、资产负债表坚如磐石的公司更感兴趣,那么请立即查看我们的净现金成长型股票清单。
对这篇文章有什么反馈吗?担心内容吗? 保持联系直接与我们联系。或者,也可以给编辑组发电子邮件,地址是implywallst.com。
本文由Simply Wall St.撰写,具有概括性。我们仅使用不偏不倚的方法提供基于历史数据和分析师预测的评论,我们的文章并不打算作为财务建议。它不构成买卖任何股票的建议,也没有考虑你的目标或你的财务状况。我们的目标是为您带来由基本面数据驱动的长期重点分析。请注意,我们的分析可能不会将最新的对价格敏感的公司公告或定性材料考虑在内。Simply Wall St.对上述任何一只股票都没有持仓。