Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Sansteel MinGuang Co.,Ltd.,Fujian (SZSE:002110) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sansteel MinGuangLtd.Fujian

What Is Sansteel MinGuangLtd.Fujian's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Sansteel MinGuangLtd.Fujian had CN¥14.9b of debt, an increase on CN¥8.76b, over one year. However, because it has a cash reserve of CN¥9.45b, its net debt is less, at about CN¥5.43b.

How Strong Is Sansteel MinGuangLtd.Fujian's Balance Sheet?

We can see from the most recent balance sheet that Sansteel MinGuangLtd.Fujian had liabilities of CN¥26.7b falling due within a year, and liabilities of CN¥2.91b due beyond that. Offsetting this, it had CN¥9.45b in cash and CN¥5.63b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥14.6b.

Given this deficit is actually higher than the company's market capitalization of CN¥11.4b, we think shareholders really should watch Sansteel MinGuangLtd.Fujian's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sansteel MinGuangLtd.Fujian's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sansteel MinGuangLtd.Fujian had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥48b. We would much prefer see growth.

Caveat Emptor

Not only did Sansteel MinGuangLtd.Fujian's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥358m 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. Not least because it burned through CN¥4.1b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Sansteel MinGuangLtd.Fujian 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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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.