Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Shanxi Taigang Stainless Steel Co., Ltd. (SZSE:000825) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

How Much Debt Does Shanxi Taigang Stainless Steel Carry?

As you can see below, Shanxi Taigang Stainless Steel had CN¥9.94b of debt at March 2024, down from CN¥13.8b a year prior. However, because it has a cash reserve of CN¥7.00b, its net debt is less, at about CN¥2.93b.

A Look At Shanxi Taigang Stainless Steel's Liabilities

According to the last reported balance sheet, Shanxi Taigang Stainless Steel had liabilities of CN¥22.4b due within 12 months, and liabilities of CN¥9.63b due beyond 12 months. On the other hand, it had cash of CN¥7.00b and CN¥2.36b worth of receivables due within a year. So it has liabilities totalling CN¥22.7b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥19.7b, we think shareholders really should watch Shanxi Taigang Stainless Steel's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shanxi Taigang Stainless Steel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shanxi Taigang Stainless Steel wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to CN¥104b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Shanxi Taigang Stainless Steel produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥1.3b 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¥485m. In the meantime, we consider the stock to be risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shanxi Taigang Stainless Steel .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.