Is Salzgitter (ETR:SZG) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Salzgitter AG (ETR:SZG) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Salzgitter

How Much Debt Does Salzgitter Carry?

As you can see below, Salzgitter had €923.9m of debt at September 2020, down from €978.1m a year prior. However, it does have €378.6m in cash offsetting this, leading to net debt of about €545.3m.

A Look At Salzgitter's Liabilities

We can see from the most recent balance sheet that Salzgitter had liabilities of €1.70b falling due within a year, and liabilities of €3.65b due beyond that. On the other hand, it had cash of €378.6m and €1.54b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.44b.

This deficit casts a shadow over the €1.00b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Salzgitter would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Salzgitter made a loss at the EBIT level, and saw its revenue drop to €7.2b, which is a fall of 20%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Salzgitter's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €258m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through €327m in the last year. 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. To that end, you should be aware of the 1 warning sign we've spotted with Salzgitter .

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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