Is Shanxi Taigang Stainless Steel (SZSE:000825) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shanxi Taigang Stainless Steel Co., Ltd. (SZSE:000825) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for Shanxi Taigang Stainless Steel

What Is Shanxi Taigang Stainless Steel's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanxi Taigang Stainless Steel had CN¥9.59b of debt in September 2024, down from CN¥10.2b, one year before. However, it also had CN¥8.76b in cash, and so its net debt is CN¥830.3m.

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

According to the last reported balance sheet, Shanxi Taigang Stainless Steel had liabilities of CN¥26.3b due within 12 months, and liabilities of CN¥7.18b due beyond 12 months. On the other hand, it had cash of CN¥8.76b and CN¥2.70b worth of receivables due within a year. So its liabilities total CN¥22.0b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥19.6b market capitalization, you might well be inclined to review the balance sheet intently. 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. There's no doubt that we learn most about debt from the balance sheet. But it is Shanxi Taigang Stainless Steel's earnings that will influence how the balance sheet holds up in the future. 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 Shanxi Taigang Stainless Steel had a loss before interest and tax, and actually shrunk its revenue by 3.7%, to CN¥101b. That's not what we would hope to see.

Caveat Emptor

Importantly, Shanxi Taigang Stainless Steel had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥2.3b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥1.3b. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shanxi Taigang Stainless Steel that you should be aware of.

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.