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.' 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. We can see that Jiangsu Shagang Co., Ltd. (SZSE:002075) does use debt in its business. But should shareholders be worried about its use of debt?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu Shagang's Net Debt?

As you can see below, at the end of September 2024, Jiangsu Shagang had CN¥12.6b of debt, up from CN¥4.24b a year ago. Click the image for more detail. But it also has CN¥15.9b in cash to offset that, meaning it has CN¥3.26b net cash.

How Strong Is Jiangsu Shagang's Balance Sheet?

According to the last reported balance sheet, Jiangsu Shagang had liabilities of CN¥16.6b due within 12 months, and liabilities of CN¥603.7m due beyond 12 months. Offsetting this, it had CN¥15.9b in cash and CN¥593.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥754.4m more than its cash and near-term receivables, combined.

Since publicly traded Jiangsu Shagang shares are worth a total of CN¥12.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Jiangsu Shagang also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu Shagang's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Jiangsu Shagang had a loss before interest and tax, and actually shrunk its revenue by 7.3%, to CN¥15b. That's not what we would hope to see.

So How Risky Is Jiangsu Shagang?

While Jiangsu Shagang lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥113m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 5 warning signs for Jiangsu Shagang you should be aware of, and 2 of them are concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.