Is Anyang Iron and Steel (SHSE:600569) Weighed On By Its Debt Load?

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.' 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 Anyang Iron and Steel Co., Ltd. (SHSE:600569) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Anyang Iron and Steel

How Much Debt Does Anyang Iron and Steel Carry?

As you can see below, Anyang Iron and Steel had CN¥9.27b of debt at September 2023, down from CN¥9.72b a year prior. On the flip side, it has CN¥6.80b in cash leading to net debt of about CN¥2.47b.

How Healthy Is Anyang Iron and Steel's Balance Sheet?

According to the last reported balance sheet, Anyang Iron and Steel had liabilities of CN¥29.8b due within 12 months, and liabilities of CN¥6.06b due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.80b as well as receivables valued at CN¥2.51b due within 12 months. So its liabilities total CN¥26.6b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥5.43b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Anyang Iron and Steel 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 it is Anyang Iron and Steel's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Anyang Iron and Steel had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to CN¥42b. That's not what we would hope to see.

Caveat Emptor

Importantly, Anyang Iron and Steel had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥1.8b 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. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥628m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Anyang Iron and Steel you should know about.

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.