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. We note that Bengang Steel Plates Co., Ltd. (SZSE:000761) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Bengang Steel Plates Carry?

The chart below, which you can click on for greater detail, shows that Bengang Steel Plates had CN¥8.87b in debt in March 2024; about the same as the year before. On the flip side, it has CN¥1.88b in cash leading to net debt of about CN¥6.99b.

How Healthy Is Bengang Steel Plates' Balance Sheet?

According to the last reported balance sheet, Bengang Steel Plates had liabilities of CN¥19.8b due within 12 months, and liabilities of CN¥9.60b due beyond 12 months. On the other hand, it had cash of CN¥1.88b and CN¥3.36b worth of receivables due within a year. So it has liabilities totalling CN¥24.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥9.88b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Bengang Steel Plates 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 Bengang Steel Plates 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.

Over 12 months, Bengang Steel Plates made a loss at the EBIT level, and saw its revenue drop to CN¥57b, which is a fall of 8.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, Bengang Steel Plates had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥2.6b 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¥2.7b. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Bengang Steel Plates you should be aware of, and 1 of them doesn't sit too well with us.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com