Is Maanshan Iron & Steel (HKG:323) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Maanshan Iron & Steel Company Limited (HKG:323) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Maanshan Iron & Steel

How Much Debt Does Maanshan Iron & Steel Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Maanshan Iron & Steel had CN¥17.4b of debt, an increase on CN¥14.3b, over one year. However, it does have CN¥6.96b in cash offsetting this, leading to net debt of about CN¥10.4b.

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

The latest balance sheet data shows that Maanshan Iron & Steel had liabilities of CN¥52.1b due within a year, and liabilities of CN¥8.93b falling due after that. On the other hand, it had cash of CN¥6.96b and CN¥7.85b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥46.2b.

The deficiency here weighs heavily on the CN¥19.2b 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. After all, Maanshan Iron & Steel 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 Maanshan Iron & Steel 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.

Over 12 months, Maanshan Iron & Steel made a loss at the EBIT level, and saw its revenue drop to CN¥98b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

While Maanshan Iron & Steel's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥3.1b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥1.5b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. For riskier companies like Maanshan Iron & Steel I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.