Hang Zhou Iron & SteelLtd (SHSE:600126) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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 note that Hang Zhou Iron & Steel Co.,Ltd. (SHSE:600126) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hang Zhou Iron & SteelLtd

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

As you can see below, Hang Zhou Iron & SteelLtd had CN¥918.2m of debt at September 2024, down from CN¥1.48b a year prior. However, its balance sheet shows it holds CN¥6.35b in cash, so it actually has CN¥5.43b net cash.

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¥12.0b due within 12 months and liabilities of CN¥302.8m due beyond that. Offsetting these obligations, it had cash of CN¥6.35b as well as receivables valued at CN¥2.69b due within 12 months. So it has liabilities totalling CN¥3.28b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hang Zhou Iron & SteelLtd has a market capitalization of CN¥15.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hang Zhou Iron & SteelLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hang Zhou Iron & SteelLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to CN¥65b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hang Zhou Iron & SteelLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Hang Zhou Iron & SteelLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥4.2b of cash and made a loss of CN¥350m. With only CN¥5.43b on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Hang Zhou Iron & SteelLtd may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For instance, we've identified 2 warning signs for Hang Zhou Iron & SteelLtd that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.