Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Salzgitter AG (ETR:SZG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Salzgitter
What Is Salzgitter's Net Debt?
The chart below, which you can click on for greater detail, shows that Salzgitter had €1.56b in debt in September 2023; about the same as the year before. On the flip side, it has €1.15b in cash leading to net debt of about €409.8m.
How Healthy Is Salzgitter's Balance Sheet?
According to the last reported balance sheet, Salzgitter had liabilities of €3.60b due within 12 months, and liabilities of €2.56b due beyond 12 months. Offsetting this, it had €1.15b in cash and €2.28b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.73b.
This deficit casts a shadow over the €1.41b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Salzgitter would likely require a major re-capitalisation if it had to pay its creditors today. 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 Salzgitter can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Salzgitter had a loss before interest and tax, and actually shrunk its revenue by 11%, to €11b. We would much prefer see growth.
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 €34m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of €330m and free cash flow of €433m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Salzgitter has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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.
About XTRA:SZG
Adequate balance sheet and fair value.
