Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Angang Steel Company Limited (HKG:347) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Angang Steel's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Angang Steel had debt of CN¥6.83b, up from CN¥3.62b in one year. However, it does have CN¥3.11b in cash offsetting this, leading to net debt of about CN¥3.72b.

How Strong Is Angang Steel's Balance Sheet?

The latest balance sheet data shows that Angang Steel had liabilities of CN¥37.8b due within a year, and liabilities of CN¥6.66b falling due after that. Offsetting this, it had CN¥3.11b in cash and CN¥4.34b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥37.0b.

This deficit casts a shadow over the CN¥17.6b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Angang Steel would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Angang Steel's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Angang Steel made a loss at the EBIT level, and saw its revenue drop to CN¥110b, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

Not only did Angang Steel'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¥5.7b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥3.2b over the last twelve months. That means it's on the risky side of things. For riskier companies like Angang Steel I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.