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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Maanshan Iron & Steel Company Limited (HKG:323) does use debt in its business. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Maanshan Iron & Steel Carry?

As you can see below, at the end of September 2024, Maanshan Iron & Steel had CN¥21.5b of debt, up from CN¥18.0b a year ago. Click the image for more detail. On the flip side, it has CN¥6.91b in cash leading to net debt of about CN¥14.6b.

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

We can see from the most recent balance sheet that Maanshan Iron & Steel had liabilities of CN¥43.1b falling due within a year, and liabilities of CN¥8.78b due beyond that. On the other hand, it had cash of CN¥6.91b and CN¥4.84b worth of receivables due within a year. So it has liabilities totalling CN¥40.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥22.2b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Maanshan Iron & Steel would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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.

View our latest analysis for Maanshan Iron & Steel

In the last year Maanshan Iron & Steel had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥87b. That's not what we would hope to see.

Caveat Emptor

Not only did Maanshan 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¥2.5b. 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 had negative free cash flow of CN¥1.7b over the last twelve months. So suffice it to say 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. Case in point: We've spotted 1 warning sign for Maanshan Iron & Steel you should be aware of.

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.

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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.