Is Maanshan Iron & Steel (HKG:323) Weighed On By Its Debt Load?

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 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. Importantly, Maanshan Iron & Steel Company Limited (HKG:323) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Maanshan Iron & Steel

What Is Maanshan Iron & Steel's Net Debt?

As you can see below, Maanshan Iron & Steel had CN¥16.5b of debt at September 2022, down from CN¥18.9b a year prior. On the flip side, it has CN¥9.22b in cash leading to net debt of about CN¥7.27b.

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

We can see from the most recent balance sheet that Maanshan Iron & Steel had liabilities of CN¥51.4b falling due within a year, and liabilities of CN¥7.15b due beyond that. On the other hand, it had cash of CN¥9.22b and CN¥11.1b worth of receivables due within a year. So it has liabilities totalling CN¥38.2b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥20.8b 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 definitely think shareholders need to watch this one closely. After all, Maanshan Iron & Steel would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Maanshan Iron & Steel can strengthen its balance sheet over time. 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 Maanshan Iron & Steel's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Maanshan Iron & Steel had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥282m. 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. It's fair to say the loss of CN¥530m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Maanshan Iron & Steel is showing 1 warning sign in our investment analysis , you should know about...

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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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.