Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Bengang Steel Plates Co., Ltd. (SZSE:000761) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Bengang Steel Plates Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Bengang Steel Plates had debt of CN¥9.68b, up from CN¥8.04b in one year. On the flip side, it has CN¥2.67b in cash leading to net debt of about CN¥7.01b.

How Strong Is Bengang Steel Plates' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bengang Steel Plates had liabilities of CN¥21.3b due within 12 months and liabilities of CN¥10.4b due beyond that. On the other hand, it had cash of CN¥2.67b and CN¥2.58b worth of receivables due within a year. So its liabilities total CN¥26.5b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥13.6b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Bengang Steel Plates would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bengang Steel Plates 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.

In the last year Bengang Steel Plates had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to CN¥54b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Bengang Steel Plates produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥3.6b. When we look at that alongside the significant liabilities, we're not particularly confident 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¥3.7b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Bengang Steel Plates that you should be aware of.

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.

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