Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Bengang Steel Plates Co., Ltd. (SZSE:200761) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bengang Steel Plates

What Is Bengang Steel Plates's Debt?

As you can see below, Bengang Steel Plates had CN¥8.26b of debt at June 2023, down from CN¥12.9b a year prior. However, because it has a cash reserve of CN¥3.66b, its net debt is less, at about CN¥4.60b.

How Strong Is Bengang Steel Plates' Balance Sheet?

The latest balance sheet data shows that Bengang Steel Plates had liabilities of CN¥19.7b due within a year, and liabilities of CN¥7.75b falling due after that. On the other hand, it had cash of CN¥3.66b and CN¥2.05b worth of receivables due within a year. So its liabilities total CN¥21.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥14.4b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Bengang Steel Plates would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bengang Steel Plates will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Bengang Steel Plates had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥58b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Bengang Steel Plates's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥2.5b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥2.8b. In the meantime, we consider the stock to be risky. 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 1 warning sign for Bengang Steel Plates that 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.

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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.