Is Liuzhou Iron&Steel (SHSE:601003) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Liuzhou Iron&Steel Co., Ltd (SHSE:601003) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Liuzhou Iron&Steel

How Much Debt Does Liuzhou Iron&Steel Carry?

The chart below, which you can click on for greater detail, shows that Liuzhou Iron&Steel had CN¥30.0b in debt in September 2023; about the same as the year before. However, it does have CN¥5.23b in cash offsetting this, leading to net debt of about CN¥24.8b.

How Strong Is Liuzhou Iron&Steel's Balance Sheet?

The latest balance sheet data shows that Liuzhou Iron&Steel had liabilities of CN¥28.5b due within a year, and liabilities of CN¥21.2b falling due after that. Offsetting these obligations, it had cash of CN¥5.23b as well as receivables valued at CN¥5.21b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥39.3b.

This deficit casts a shadow over the CN¥7.28b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Liuzhou Iron&Steel would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Liuzhou Iron&Steel's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Liuzhou Iron&Steel had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥75b. We would much prefer see growth.

Caveat Emptor

Not only did Liuzhou Iron&Steel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥534m 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. Nevertheless, we would not bet on it given that it vaporized CN¥2.3b in cash over the last twelve months, and it doesn't have much by way of liquid assets. 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. 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. We've identified 2 warning signs with Liuzhou Iron&Steel , and understanding them should be part of your investment process.

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.