Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Hang Zhou Iron & Steel Co.,Ltd. (SHSE:600126) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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 Hang Zhou Iron & SteelLtd Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hang Zhou Iron & SteelLtd had CN¥2.02b of debt, an increase on CN¥1.24b, over one year. However, its balance sheet shows it holds CN¥5.90b in cash, so it actually has CN¥3.87b net cash.
A Look At Hang Zhou Iron & SteelLtd's Liabilities
The latest balance sheet data shows that Hang Zhou Iron & SteelLtd had liabilities of CN¥12.4b due within a year, and liabilities of CN¥324.0m falling due after that. On the other hand, it had cash of CN¥5.90b and CN¥3.75b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.07b.
Since publicly traded Hang Zhou Iron & SteelLtd shares are worth a total of CN¥16.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Hang Zhou Iron & SteelLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hang Zhou Iron & SteelLtd 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, Hang Zhou Iron & SteelLtd reported revenue of CN¥59b, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Hang Zhou Iron & SteelLtd?
Although Hang Zhou Iron & SteelLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥185m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Hang Zhou Iron & SteelLtd is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. Be aware that Hang Zhou Iron & SteelLtd is showing 3 warning signs in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.