Is Sansteel MinGuangLtd.Fujian (SZSE:002110) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Sansteel MinGuang Co.,Ltd.,Fujian (SZSE:002110) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sansteel MinGuangLtd.Fujian

What Is Sansteel MinGuangLtd.Fujian's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Sansteel MinGuangLtd.Fujian had debt of CN¥16.5b, up from CN¥12.3b in one year. However, it does have CN¥7.97b in cash offsetting this, leading to net debt of about CN¥8.58b.

A Look At Sansteel MinGuangLtd.Fujian's Liabilities

We can see from the most recent balance sheet that Sansteel MinGuangLtd.Fujian had liabilities of CN¥28.4b falling due within a year, and liabilities of CN¥3.93b due beyond that. Offsetting this, it had CN¥7.97b in cash and CN¥4.11b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥20.3b.

The deficiency here weighs heavily on the CN¥9.11b 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, Sansteel MinGuangLtd.Fujian would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sansteel MinGuangLtd.Fujian's ability to maintain a healthy balance sheet going forward. 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 Sansteel MinGuangLtd.Fujian had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to CN¥47b. We would much prefer see growth.

Caveat Emptor

Importantly, Sansteel MinGuangLtd.Fujian had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥47m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥1.9b in negative free cash flow over the last year. That means it's on the risky side of things. 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 example, we've discovered 3 warning signs for Sansteel MinGuangLtd.Fujian that you should be aware of before investing here.

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.