Is Jiangsu Shagang (SZSE:002075) A Risky Investment?

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.' 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. As with many other companies Jiangsu Shagang Co., Ltd. (SZSE:002075) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jiangsu Shagang

What Is Jiangsu Shagang's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangsu Shagang had debt of CN¥12.6b, up from CN¥4.24b in one year. But it also has CN¥15.9b in cash to offset that, meaning it has CN¥3.26b net cash.

A Look At Jiangsu Shagang's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Shagang had liabilities of CN¥16.6b due within 12 months and liabilities of CN¥603.7m due beyond that. On the other hand, it had cash of CN¥15.9b and CN¥593.9m worth of receivables due within a year. So its liabilities total CN¥754.4m more than the combination of its cash and short-term receivables.

Given Jiangsu Shagang has a market capitalization of CN¥13.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jiangsu Shagang also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu Shagang will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jiangsu Shagang made a loss at the EBIT level, and saw its revenue drop to CN¥15b, which is a fall of 7.3%. We would much prefer see growth.

So How Risky Is Jiangsu Shagang?

While Jiangsu Shagang lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥113m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Jiangsu Shagang (at least 2 which are potentially serious) , 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.