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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Angang Steel Company Limited (HKG:347) does use debt in its business. But should shareholders be worried about its use of debt?
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 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.
See our latest analysis for Angang Steel
What Is Angang Steel's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2024 Angang Steel had debt of CN¥8.65b, up from CN¥5.45b in one year. However, it also had CN¥3.11b in cash, and so its net debt is CN¥5.53b.
A Look At Angang Steel's Liabilities
The latest balance sheet data shows that Angang Steel had liabilities of CN¥38.9b due within a year, and liabilities of CN¥9.36b falling due after that. Offsetting these obligations, it had cash of CN¥3.11b as well as receivables valued at CN¥4.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥40.9b.
This deficit casts a shadow over the CN¥20.8b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Angang Steel 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 it is future earnings, more than anything, that will determine Angang Steel's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Angang Steel made a loss at the EBIT level, and saw its revenue drop to CN¥107b, which is a fall of 8.0%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Angang Steel produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥6.6b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥4.4b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Angang Steel's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.