Sinosteel Engineering & Technology (SZSE:000928) Has A Pretty Healthy Balance Sheet

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.' 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 note that Sinosteel Engineering & Technology Co., Ltd. (SZSE:000928) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sinosteel Engineering & Technology

What Is Sinosteel Engineering & Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Sinosteel Engineering & Technology had debt of CN¥911.5m at the end of September 2024, a reduction from CN¥1.64b over a year. But it also has CN¥4.95b in cash to offset that, meaning it has CN¥4.03b net cash.

A Look At Sinosteel Engineering & Technology's Liabilities

The latest balance sheet data shows that Sinosteel Engineering & Technology had liabilities of CN¥16.7b due within a year, and liabilities of CN¥574.7m falling due after that. On the other hand, it had cash of CN¥4.95b and CN¥9.24b worth of receivables due within a year. So its liabilities total CN¥3.07b more than the combination of its cash and short-term receivables.

Sinosteel Engineering & Technology has a market capitalization of CN¥10.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Sinosteel Engineering & Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sinosteel Engineering & Technology grew its EBIT at 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sinosteel Engineering & Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sinosteel Engineering & Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Sinosteel Engineering & Technology recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Sinosteel Engineering & Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥4.03b. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with Sinosteel Engineering & Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Sinosteel Engineering & Technology (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.