Is S.A.L. Steel (NSE:SALSTEEL) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that S.A.L. Steel Limited (NSE:SALSTEEL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for S.A.L. Steel

What Is S.A.L. Steel's Debt?

You can click the graphic below for the historical numbers, but it shows that S.A.L. Steel had ₹1.62b of debt in September 2020, down from ₹1.80b, one year before. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is S.A.L. Steel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that S.A.L. Steel had liabilities of ₹1.27b due within 12 months and liabilities of ₹1.55b due beyond that. Offsetting this, it had ₹8.10m in cash and ₹982.7m in receivables that were due within 12 months. So it has liabilities totalling ₹1.83b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹221.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, S.A.L. Steel would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since S.A.L. Steel 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, S.A.L. Steel made a loss at the EBIT level, and saw its revenue drop to ₹2.8b, which is a fall of 41%. That makes us nervous, to say the least.

Caveat Emptor

Not only did S.A.L. Steel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹493m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹37m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 S.A.L. Steel you should be aware of, and 1 of them is significant.

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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