Does Salzgitter (ETR:SZG) Have A Healthy Balance Sheet?

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.' 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. We can see that Salzgitter AG (ETR:SZG) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Salzgitter

What Is Salzgitter's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Salzgitter had €1.12b of debt, an increase on €975.0m, over one year. On the flip side, it has €628.4m in cash leading to net debt of about €490.2m.

How Healthy Is Salzgitter's Balance Sheet?

The latest balance sheet data shows that Salzgitter had liabilities of €2.42b due within a year, and liabilities of €3.34b falling due after that. Offsetting these obligations, it had cash of €628.4m as well as receivables valued at €1.87b due within 12 months. So it has liabilities totalling €3.27b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €1.44b 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, Salzgitter 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 it is future earnings, more than anything, that will determine Salzgitter'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 Salzgitter had a loss before interest and tax, and actually shrunk its revenue by 15%, to €7.1b. That's not what we would hope to see.

Caveat Emptor

While Salzgitter's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €234m 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 €82m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Salzgitter is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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