Is Gansu Jiu Steel Group Hongxing Iron & SteelLtd (SHSE:600307) Using Debt Sensibly?

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.' 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 Gansu Jiu Steel Group Hongxing Iron & Steel Co.,Ltd. (SHSE:600307) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Gansu Jiu Steel Group Hongxing Iron & SteelLtd

What Is Gansu Jiu Steel Group Hongxing Iron & SteelLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Gansu Jiu Steel Group Hongxing Iron & SteelLtd had CN¥19.2b of debt, an increase on CN¥17.0b, over one year. However, because it has a cash reserve of CN¥1.72b, its net debt is less, at about CN¥17.4b.

A Look At Gansu Jiu Steel Group Hongxing Iron & SteelLtd's Liabilities

The latest balance sheet data shows that Gansu Jiu Steel Group Hongxing Iron & SteelLtd had liabilities of CN¥27.3b due within a year, and liabilities of CN¥9.22b falling due after that. Offsetting these obligations, it had cash of CN¥1.72b as well as receivables valued at CN¥2.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥32.5b.

This deficit casts a shadow over the CN¥7.14b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Gansu Jiu Steel Group Hongxing Iron & SteelLtd 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 Gansu Jiu Steel Group Hongxing Iron & SteelLtd 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.

In the last year Gansu Jiu Steel Group Hongxing Iron & SteelLtd had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥37b. We would much prefer see growth.

Caveat Emptor

While Gansu Jiu Steel Group Hongxing Iron & SteelLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥1.2b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CN¥3.3b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Gansu Jiu Steel Group Hongxing Iron & SteelLtd , and understanding them should be part of your investment process.

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.