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.
伯克希爾哈撒韋的外部基金經理理想汽車·盧直言不諱地説,最大的投資風險不是價格的波動,而是你是否會遭受永久性的資本損失。因此,當你考慮到任何一隻股票的風險有多大時,你需要考慮債務可能是顯而易見的,因為太多的債務可能會讓一家公司倒閉。與許多其他公司一樣貴州省鋼絲繩股份有限公司(上海證券交易所:600992)利用債務。但股東是否應該擔心它的債務使用情況?
為什麼債務會帶來風險?
債務是幫助企業發展的一種工具,但如果一家企業無法償還貸款人的債務,那麼它就只能聽從貸款人的擺佈。如果情況真的變得很糟糕,貸款人可以控制業務。儘管這並不常見,但我們確實經常看到負債累累的公司永久性地稀釋股東的權益,因為貸款人迫使他們以令人沮喪的價格籌集資金。當然,債務的好處是,它往往代表着廉價資本,特別是當它用能夠以高回報率進行再投資的能力取代公司的稀釋時。在考慮一家公司的債務水平時,第一步是同時考慮其現金和債務。
查看我們對貴州鋼絲繩的最新分析
貴州鋼絲繩的債務是什麼?
下圖顯示,截至2022年6月底,貴州鋼絲繩的債務為6.562億加元,低於一年來的8.135億加元。你可以點擊下面的圖片查看更多細節。然而,由於它擁有4.449億加元的現金儲備,其淨債務較少,約為2.113億加元。
上證綜指:600992債轉股歷史2022年9月9日
貴州鋼絲繩的資產負債表有多強?
放大最新的資產負債表數據可以看到,貴州鋼絲繩有14.8億加元的負債在12個月內到期,還有3.396億加元的負債在12個月內到期。另一方面,它有4.449億加元的現金和4.686億加元的應收賬款在一年內到期。因此,它的負債總額比現金和近期應收賬款加起來還要多9.083億元。
鑑於貴州鋼絲繩的市值為95.1億元人民幣,很難相信這些債務會構成太大威脅。但有足夠的負債,我們肯定會建議股東繼續監控未來的資產負債表。
為了評估一家公司的債務相對於它的收益,我們計算它的淨債務除以它的利息、税項、折舊和攤銷前收益(EBITDA)和它的利息和税前收益(EBIT)除以它的利息支出(它的利息覆蓋)。這樣,我們既考慮了債務的絕對量,也考慮了為其支付的利率。
奇怪的是,貴州鋼絲繩的EBITDA比率達到了6.3的天價,這意味着債務很高,但利息覆蓋率高達1k。因此,要麼它可以獲得非常便宜的長期債務,要麼利息支出將會增長!股東們應該知道,貴州鋼絲繩的息税前利潤去年下降了77%。如果這種盈利趨勢持續下去,那麼償還債務就像把貓趕上過山車一樣容易。當你分析債務時,資產負債表顯然是你關注的領域。但你不能完全孤立地看待債務,因為貴州鋼絲繩需要盈利來償還債務。因此,如果你熱衷於瞭解更多關於它的收益,可能值得查看一下它的長期收益趨勢圖。
最後,儘管税務人員可能喜歡會計利潤,但貸款人只接受冷硬現金。因此,我們總是檢查EBIT中有多少轉化為自由現金流。在過去的三年裏,貴州鋼絲繩燒掉了大量現金。儘管投資者無疑預計這種情況會在適當的時候逆轉,但這顯然意味着它使用債務的風險更大。
我們的觀點
坦率地説,貴州鋼繩將息税前利潤轉換為自由現金流,以及其息税前利潤(不)增長的記錄,都讓我們對其債務水平感到相當不安。但從好的方面來看,它的利息覆蓋是一個好兆頭,讓我們更加樂觀。總體而言,我們認為,可以公平地説,貴州鋼絲繩的債務足夠多,資產負債表周圍存在一些真正的風險。如果一切順利,這可能會得到回報,但這筆債務的不利之處是永久性損失的風險更大。在分析債務水平時,資產負債表顯然是一個起點。然而,並非所有投資風險都存在於資產負債表中--遠非如此。例如,我們已經確定貴州鋼絲繩的3個警示標誌(1是重要的)您應該知道。
如果你對一家增長迅速、資產負債表堅如磐石的公司更感興趣,那麼請立即查看我們的淨現金成長型股票清單。
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本文由Simply Wall St.撰寫,具有概括性。我們僅使用不偏不倚的方法提供基於歷史數據和分析師預測的評論,我們的文章並不打算作為財務建議。它不構成買賣任何股票的建議,也沒有考慮你的目標或你的財務狀況。我們的目標是為您帶來由基本面數據驅動的長期重點分析。請注意,我們的分析可能不會將最新的對價格敏感的公司公告或定性材料考慮在內。Simply Wall St.對上述任何一隻股票都沒有持倉。