Bengang Steel Plates (SZSE:000761) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Bengang Steel Plates Co., Ltd. (SZSE:000761) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bengang Steel Plates

What Is Bengang Steel Plates's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Bengang Steel Plates had CN¥9.68b of debt, an increase on CN¥8.04b, over one year. However, because it has a cash reserve of CN¥2.67b, its net debt is less, at about CN¥7.01b.

A Look At Bengang Steel Plates' Liabilities

The latest balance sheet data shows that Bengang Steel Plates had liabilities of CN¥21.3b due within a year, and liabilities of CN¥10.4b falling due after that. Offsetting these obligations, it had cash of CN¥2.67b as well as receivables valued at CN¥2.58b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥26.5b.

This deficit casts a shadow over the CN¥13.7b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Bengang Steel Plates would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bengang Steel Plates will need earnings to service that debt. 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 Bengang Steel Plates had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to CN¥54b. That's not what we would hope to see.

Caveat Emptor

Importantly, Bengang Steel Plates had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥3.6b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥3.7b. In the meantime, we consider the stock to be risky. 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. For example - Bengang Steel Plates has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.