Is Sansteel MinGuangLtd.Fujian (SZSE:002110) Using Debt In A Risky Way?

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. Importantly, Sansteel MinGuang Co.,Ltd.,Fujian (SZSE:002110) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sansteel MinGuangLtd.Fujian

How Much Debt Does Sansteel MinGuangLtd.Fujian Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sansteel MinGuangLtd.Fujian had CN¥17.9b of debt, an increase on CN¥14.9b, over one year. On the flip side, it has CN¥8.64b in cash leading to net debt of about CN¥9.21b.

How Healthy Is Sansteel MinGuangLtd.Fujian's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sansteel MinGuangLtd.Fujian had liabilities of CN¥29.5b due within 12 months and liabilities of CN¥3.95b due beyond that. On the other hand, it had cash of CN¥8.64b and CN¥3.52b worth of receivables due within a year. So its liabilities total CN¥21.3b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥8.33b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Sansteel MinGuangLtd.Fujian would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sansteel MinGuangLtd.Fujian 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.

In the last year Sansteel MinGuangLtd.Fujian's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Sansteel MinGuangLtd.Fujian had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥913m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CN¥4.0b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Sansteel MinGuangLtd.Fujian you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.