Is Shanxi Taigang Stainless Steel (SZSE:000825) Using Debt In A Risky Way?

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.' 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. Importantly, Shanxi Taigang Stainless Steel Co., Ltd. (SZSE:000825) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shanxi Taigang Stainless Steel

What Is Shanxi Taigang Stainless Steel's Net Debt?

As you can see below, Shanxi Taigang Stainless Steel had CN¥9.94b of debt at March 2024, down from CN¥13.8b a year prior. However, it also had CN¥7.00b in cash, and so its net debt is CN¥2.93b.

How Healthy Is Shanxi Taigang Stainless Steel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanxi Taigang Stainless Steel had liabilities of CN¥22.4b due within 12 months and liabilities of CN¥9.63b due beyond that. On the other hand, it had cash of CN¥7.00b and CN¥2.36b worth of receivables due within a year. So its liabilities total CN¥22.7b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥22.0b, we think shareholders really should watch Shanxi Taigang Stainless Steel's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanxi Taigang Stainless Steel can strengthen its balance sheet over time. 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 Shanxi Taigang Stainless Steel wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to CN¥104b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Shanxi Taigang Stainless Steel produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥1.3b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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¥485m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shanxi Taigang Stainless Steel , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.