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.' 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 Shandong Iron and Steel Company Ltd. (SHSE:600022) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Shandong Iron and Steel
How Much Debt Does Shandong Iron and Steel Carry?
As you can see below, Shandong Iron and Steel had CN¥12.3b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥6.80b in cash leading to net debt of about CN¥5.53b.
A Look At Shandong Iron and Steel's Liabilities
We can see from the most recent balance sheet that Shandong Iron and Steel had liabilities of CN¥28.0b falling due within a year, and liabilities of CN¥8.44b due beyond that. Offsetting these obligations, it had cash of CN¥6.80b as well as receivables valued at CN¥1.97b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥27.7b.
The deficiency here weighs heavily on the CN¥13.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Shandong Iron and Steel would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shandong Iron and Steel 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.
In the last year Shandong Iron and Steel had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to CN¥94b. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Shandong Iron and Steel produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥394m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥127m didn't encourage us either; we'd like to see a profit. 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. We've identified 2 warning signs with Shandong Iron and Steel , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.