Does Hang Zhou Iron & SteelLtd (SHSE:600126) Have A Healthy Balance Sheet?

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 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. Importantly, Hang Zhou Iron & Steel Co.,Ltd. (SHSE:600126) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hang Zhou Iron & SteelLtd

What Is Hang Zhou Iron & SteelLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hang Zhou Iron & SteelLtd had CN¥2.02b of debt, an increase on CN¥1.24b, over one year. However, it does have CN¥5.90b in cash offsetting this, leading to net cash of CN¥3.87b.

How Healthy Is Hang Zhou Iron & SteelLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hang Zhou Iron & SteelLtd had liabilities of CN¥12.4b due within 12 months and liabilities of CN¥324.0m due beyond that. On the other hand, it had cash of CN¥5.90b and CN¥3.75b worth of receivables due within a year. So it has liabilities totalling CN¥3.07b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hang Zhou Iron & SteelLtd is worth CN¥13.1b, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, Hang Zhou Iron & SteelLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hang Zhou Iron & SteelLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Hang Zhou Iron & SteelLtd reported revenue of CN¥59b, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hang Zhou Iron & SteelLtd?

Although Hang Zhou Iron & SteelLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥185m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for Hang Zhou Iron & SteelLtd shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Hang Zhou Iron & SteelLtd .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com