Is Bengang Steel Plates (SZSE:000761) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Bengang Steel Plates Co., Ltd. (SZSE:000761) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bengang Steel Plates

What Is Bengang Steel Plates's Net Debt?

As you can see below, Bengang Steel Plates had CN¥8.87b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥1.88b in cash, and so its net debt is CN¥6.99b.

A Look At Bengang Steel Plates' Liabilities

The latest balance sheet data shows that Bengang Steel Plates had liabilities of CN¥19.8b due within a year, and liabilities of CN¥9.60b falling due after that. Offsetting these obligations, it had cash of CN¥1.88b as well as receivables valued at CN¥3.36b due within 12 months. So it has liabilities totalling CN¥24.1b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥11.2b 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. At the end of the day, Bengang Steel Plates would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 8.0%, to CN¥57b. 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¥2.6b 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. It's fair to say the loss of CN¥2.7b didn't encourage us either; we'd like to see a profit. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Bengang Steel Plates (of which 1 shouldn't be ignored!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.