Is Anyang Iron and SteelLtd (SHSE:600569) Using Debt Sensibly?

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. We can see that Anyang Iron and Steel Co.,Ltd. (SHSE:600569) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Anyang Iron and SteelLtd

What Is Anyang Iron and SteelLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Anyang Iron and SteelLtd had CN¥10.9b of debt, an increase on CN¥9.91b, over one year. However, it does have CN¥5.76b in cash offsetting this, leading to net debt of about CN¥5.10b.

A Look At Anyang Iron and SteelLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Anyang Iron and SteelLtd had liabilities of CN¥32.1b due within 12 months and liabilities of CN¥5.51b due beyond that. Offsetting this, it had CN¥5.76b in cash and CN¥2.08b in receivables that were due within 12 months. So its liabilities total CN¥29.7b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥5.80b 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 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 it is Anyang Iron and 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 Anyang Iron and SteelLtd had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥34b. We would much prefer see growth.

Caveat Emptor

Not only did Anyang Iron and SteelLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥3.3b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥1.7b in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Anyang Iron and SteelLtd that you should be aware of.

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.