David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Bengang Steel Plates Co., Ltd. (SZSE:000761) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Bengang Steel Plates's Net Debt?

As you can see below, Bengang Steel Plates had CN¥8.04b of debt at September 2023, down from CN¥10.8b a year prior. However, because it has a cash reserve of CN¥2.31b, its net debt is less, at about CN¥5.73b.

How Healthy Is Bengang Steel Plates' Balance Sheet?

According to the last reported balance sheet, Bengang Steel Plates had liabilities of CN¥19.9b due within 12 months, and liabilities of CN¥8.54b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.31b as well as receivables valued at CN¥3.18b due within 12 months. So its liabilities total CN¥22.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥14.1b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Bengang Steel Plates would probably need a major re-capitalization if its creditors were to demand repayment. 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 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.

Over 12 months, Bengang Steel Plates made a loss at the EBIT level, and saw its revenue drop to CN¥58b, which is a fall of 9.4%. We would much prefer see growth.

Caveat Emptor

Importantly, Bengang Steel Plates had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥2.0b. 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. For example, we would not want to see a repeat of last year's loss of CN¥2.2b. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Bengang Steel Plates has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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