Qingdao East Steel Tower StockLtd (SZSE:002545) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Qingdao East Steel Tower Stock Co.Ltd (SZSE:002545) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Qingdao East Steel Tower StockLtd

How Much Debt Does Qingdao East Steel Tower StockLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Qingdao East Steel Tower StockLtd had CN¥1.70b of debt in March 2024, down from CN¥2.01b, one year before. But it also has CN¥2.64b in cash to offset that, meaning it has CN¥940.6m net cash.

How Healthy Is Qingdao East Steel Tower StockLtd's Balance Sheet?

We can see from the most recent balance sheet that Qingdao East Steel Tower StockLtd had liabilities of CN¥2.58b falling due within a year, and liabilities of CN¥1.81b due beyond that. Offsetting these obligations, it had cash of CN¥2.64b as well as receivables valued at CN¥964.1m due within 12 months. So its liabilities total CN¥777.2m more than the combination of its cash and short-term receivables.

Of course, Qingdao East Steel Tower StockLtd has a market capitalization of CN¥10.0b, so these liabilities are probably manageable. 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, Qingdao East Steel Tower StockLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Qingdao East Steel Tower StockLtd's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Qingdao East Steel Tower StockLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Qingdao East Steel Tower StockLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Qingdao East Steel Tower StockLtd produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Qingdao East Steel Tower StockLtd has CN¥940.6m in net cash. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in CN¥1.1b. So we don't have any problem with Qingdao East Steel Tower StockLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Qingdao East Steel Tower StockLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.