Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Sansteel MinGuang Co.,Ltd.,Fujian (SZSE:002110) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Sansteel MinGuangLtd.Fujian's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sansteel MinGuangLtd.Fujian had CN¥16.5b of debt, an increase on CN¥12.3b, over one year. On the flip side, it has CN¥7.97b in cash leading to net debt of about CN¥8.58b.

How Healthy Is Sansteel MinGuangLtd.Fujian's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sansteel MinGuangLtd.Fujian had liabilities of CN¥28.4b due within 12 months and liabilities of CN¥3.93b due beyond that. Offsetting these obligations, it had cash of CN¥7.97b as well as receivables valued at CN¥4.11b due within 12 months. So its liabilities total CN¥20.3b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥9.11b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sansteel MinGuangLtd.Fujian would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sansteel MinGuangLtd.Fujian'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 Sansteel MinGuangLtd.Fujian had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to CN¥47b. That's not what we would hope to see.

Caveat Emptor

Importantly, Sansteel MinGuangLtd.Fujian had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥47m. 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. Not least because it burned through CN¥1.9b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Sansteel MinGuangLtd.Fujian that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.