We Think Sinosteel Engineering & Technology (SZSE:000928) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Sinosteel Engineering & Technology Co., Ltd. (SZSE:000928) makes use of debt. But is this debt a concern to shareholders?

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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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Sinosteel Engineering & Technology's Debt?

The chart below, which you can click on for greater detail, shows that Sinosteel Engineering & Technology had CN¥968.9m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥4.95b in cash, so it actually has CN¥3.98b net cash.

A Look At Sinosteel Engineering & Technology's Liabilities

According to the last reported balance sheet, Sinosteel Engineering & Technology had liabilities of CN¥16.7b due within 12 months, and liabilities of CN¥574.7m due beyond 12 months. Offsetting this, it had CN¥4.95b in cash and CN¥9.24b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.07b.

This deficit isn't so bad because Sinosteel Engineering & Technology is worth CN¥9.38b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Sinosteel Engineering & Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Sinosteel Engineering & Technology

The good news is that Sinosteel Engineering & Technology has increased its EBIT by 6.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Looking at the most recent three years, Sinosteel Engineering & Technology recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Sinosteel Engineering & Technology does have more liabilities than liquid assets, it also has net cash of CN¥3.98b. On top of that, it increased its EBIT by 6.4% in the last twelve months. So we are not troubled with Sinosteel Engineering & Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Sinosteel Engineering & Technology .

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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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.