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.' 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. We can see that Liuzhou Iron&Steel Co., Ltd (SHSE:601003) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Liuzhou Iron&Steel

What Is Liuzhou Iron&Steel's Debt?

As you can see below, at the end of June 2023, Liuzhou Iron&Steel had CN¥30.5b of debt, up from CN¥27.6b a year ago. Click the image for more detail. On the flip side, it has CN¥6.27b in cash leading to net debt of about CN¥24.2b.

A Look At Liuzhou Iron&Steel's Liabilities

The latest balance sheet data shows that Liuzhou Iron&Steel had liabilities of CN¥27.6b due within a year, and liabilities of CN¥22.3b falling due after that. Offsetting this, it had CN¥6.27b in cash and CN¥7.28b in receivables that were due within 12 months. So its liabilities total CN¥36.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥9.48b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Liuzhou Iron&Steel would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Liuzhou Iron&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.

Over 12 months, Liuzhou Iron&Steel made a loss at the EBIT level, and saw its revenue drop to CN¥73b, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Liuzhou Iron&Steel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥2.5b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥829m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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 instance, we've identified 2 warning signs for Liuzhou Iron&Steel that you should be aware of.

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.