Chongqing Iron & Steel (HKG:1053) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Chongqing Iron & Steel Company Limited (HKG:1053) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chongqing Iron & Steel

What Is Chongqing Iron & Steel's Net Debt?

As you can see below, Chongqing Iron & Steel had CN¥5.81b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥2.09b in cash offsetting this, leading to net debt of about CN¥3.72b.

How Strong Is Chongqing Iron & Steel's Balance Sheet?

According to the last reported balance sheet, Chongqing Iron & Steel had liabilities of CN¥13.9b due within 12 months, and liabilities of CN¥3.45b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.09b as well as receivables valued at CN¥504.3m due within 12 months. So its liabilities total CN¥14.8b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥10.5b, we think shareholders really should watch Chongqing Iron & Steel's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chongqing Iron & Steel will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Chongqing Iron & Steel made a loss at the EBIT level, and saw its revenue drop to CN¥33b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did Chongqing Iron & Steel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥1.7b. 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. It's fair to say the loss of CN¥1.7b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Chongqing Iron & Steel that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.